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Solid bric lays foundations of recovery

With the first formal Bric summit ending last week, these nations are beginning to flex their financial muscle and are showing significant potential for growth despite the economic downturn.

As Western nations are struggling with crippling amounts of debt, the Bric sector is rapidly expanding due to abundance of natural resources and the fact that these countries are unfettered by debt.

In a situation unthinkable just a couple of years ago, Brazil recently offered to lend £10bn to the International Monetary Fund.

On the back of this shift in power, investors have spotted the growth potential and Bric funds have seen a resurgence in popularity in recent months.

Allianz RCM Bric Stars Fund manager Michael Konstantinov says the main attraction is that there is still growth in the Bric sector, primarily because their domestic economies are the main driver of economic growth which means the global slump is not affecting them as much as Western nations.

Brazil, Russia, India and China have all put fiscal and monetary stimulus packages in place which have boosted growth.

Konstantinov says: “The banking systems are in a much better shape. They have not gone through a property bubble or a consumer debt bubble which has burst. To the contrary, all of the markets are still fairly underpenetrated and are in terms of the cycle, still at a very low banking penetration, increasing leverage from very low levels and actually have quite solid banking systems.”

The Allianz Bric fund holds 35 per cent in energy, 20 per cent in financials and 12 per cent in materials. Over six months, the fund has returned 55 per cent compared with a sector average of 37 per cent.

Konstantinov believes the Bric countries are likely to emerge from the recession first because they do not need to recapitalise the banking system and because the fiscal stimulus initiatives appear to be working.

He says: “China is already showing the first results, even Brazil and India are to a certain extent. I think they will certainly stabilise faster and they are already doing that. The growth will not be dragged down by the difficulties in the financial system. They will only be dragged down on the export side but here exports are not as significant for economic growth as they are, for instance, in Japan and Germany.”

He is looking for companies with strong balance sheets that are well positioned in their marketplace and will use the economic situation to capture more market share. He cites Brazil’s leading car rental company Localiza as an example of one such company.

In China, he says the internet sector is rapidly expanding due to Government subsidies and with it the online gaming market is growing and he is building exposure to that area.

He thinks the Bric countries will rise in economic and political importance globally and says we are in the midst of a major shift in economic power away from the G7 towards the Bric nations.

But in the short term, he would not be surprised to see a correction of 10 to 15 per cent in the sector because share prices have had a good run over the past three and a half months. However, by the end of the year, he expects to see higher share prices.

Baillie Gifford launched its Greater China fund at the end of last year and wealth management marketing director James Budden says this was because they believe China is going to have a massive influence.

He says: “We are very bullish on emerging markets and Bric economies and China in particular. These are new economies that have got real assets, they have things to sell and they are not broke. They have cash in the bank so they can afford to kickstart their economies whereas everyone else in the West is having to do that with tomorrow’s money.”

Budden says the Bric economies are going to emerge from the credit crunch with a much stronger competitive advantage than they had going into it.

In China, property prices are rising, retail sales are rising and bank lending is working its way through the system according to Budden. He says that it is still relatively inefficient as a market and so there are many opportunities there.

The fund mainly invests in oil, gas, basic resources and banks. He believes that any investor with a five or 10-year view should be investing in the Bric sector.

Neptune emerging markets fund manager Ewan Thompson says there are many important differences in the catalysts for the individual Bric markets. He says the Brazilian and Russian markets are quite closely tied to the performance of the oil price because they are major commodity exporters.

In contrast, India and China are major commodity importers and benefit from lower raw material costs but he says a common theme across all four markets is a long-term structural shift in the economy towards a bigger middle-class and greater domestic consumption.

He says: “These developments are relatively insulated from the global recession, especially in China and India which are comparatively self-supporting economies.”

Thompson thinks the recent resurgence of interest in these funds can be attributed to the increased awareness of the strength of these economies and their more attractive growth prospects compared with developed markets.

He adds: “Crucially, a large number of emerging economies have significant savings which can be used to fund infrastructure growth and they are not reliant on borrowing money through capital markets.

“Industrialisation and urbanisation are, of course, also intensive in energy and materials and, to a large degree, the major global suppliers of raw material are emerging markets and therefore present attractive investment opportunities in these sectors.”

Threadneedle head of global emerging market equities Julian Thompson says: “While the green shoots may be thin on the ground in developed markets, the recovery in emerging market economies, especially the Brics, is more readily visible.

“Our emerging markets funds favour Brazil, Russia and China from an investment perspective. India continues to have excellent long-term growth prospects but appears a little expensive relative to other emerging economies.”

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