Growth again Brics’ driving force
The fastest-growing emerging economies are back on track, according to latest data
RESURGENT growth is reviving one of the past decade’s hottest trades.
Emerging-market investors are again piling into the so-called Bric nations – Brazil, Russia, India, China and South Africa – pushing monthly inflows and stock prices to nearly two-year highs. The bet is that a pick up in the global economy will fuel demand for the countries’ commodity exports, drive an expansion of middle-class consumption and help them shore up fiscal accounts.
Wooed by India’s efforts to streamline regulations, Brazil’s economic rebound, stabilising prices for Russian oil exports and China’s stronger currency, traders are warming to the countries’ higher yields and better outlook for equities.
It’s an abrupt reversal after they were scorched by a 40 percent drop in the biggest Bric exchange-traded fund from the end of 2012 to early 2016 as Brazil lost its investment grade, Chinese growth slowed from a meteoric pace, Russia’s oil revenue plummeted and India’s current account deficit swelled.
“Improving fundamentals, attractive valuations, and high yields in a yield-starved world make emerging markets once again attractive, including some of the Brics,” Jens Nystedt, a New York-based money manager at Morgan Stanley Investment Management overseeing $417 billion (R5.33 trillion) in assets, wrote in an e-mail.
Non-resident portfolio flows into Bric nations rose to $166.5bn last month, up from $28.3bn in outflows 12 months prior, according to data compiled by the Institute of International Finance and EPFR Global.
Chinese equities saw their biggest quarterly inflows in two years, while traders piled into Indian bonds at the highest level in almost three years, data show.
Mark Mobius, executive chairperson of Templeton Emerging Markets Group, favours Brazil, China and India, adding that Russia will also benefit from a growth rebound. Brazilian assets will benefit as Latin America’s largest economy bounces back from two years of contractions, while Chinese investment will pick up as its foreign reserves recover from a six-year low in January, according to Steve Hooker, who helps oversee $12bn of assets as an emerging-market money manager at Newfleet Asset Management. Coined in 2001 by former Goldman Sachs economist Jim O’Neill, “Bric” became a ubiquitous shorthand for the fastest-growing emerging economies (other investors later added South Africa to the mix). In the decade ending December 30, 2012, developing-nation equities had annual returns of 17 percent, twice those of developed nations.
That changed in the taper tantrum years amid fears that the Fragile Five, which included Brazil and India, would struggle to meet high external funding needs.
Responding to changing sentiment, Goldman Sachs Group shut its Bric fund in October 2015 after losing 88 percent of its assets since a 2010 peak.
Earlier this year, Goldman signalled its partial return, urging investors to “stay the course” with a bet on currencies from Brazil, Russia and India. Meanwhile, O’Neill, who later served as commercial secretary to the UK Treasury, said last month that fears of an economic slowdown in China are “completely overblown.”
To him, the world’s top story remains the rise of emerging-market consumers, led by China’s mushrooming middle class.
In India, measures designed to fuel growth and investment spearheaded by Prime Minister Narendra Modi could remake the world’s second-most populous nation into one of the more dynamic markets over the next several years, according to Charles Knudsen, who helps oversee $16.5bn in emerging-market assets for T Rowe Price Group from Baltimore.
The country is expected to reclaim its crown from China as the world’s fastest-growing large economy over the next three years.