“Russia’s outlook is the bleakest of the four BRIC economies,” he said, “but the significant difference is the stock market valuation metrics. There is a very negative scenario priced into the Russian stock market, and you should not just look at the headline economic figures when investing in emerging markets.
“We have seen the market rise 20% this year, but it is the currency that has doubled sterling return. Also, in terms of yield, the energy companies are quite enticing – given that they are part-state-owned they can hold the yields that they are paying out. Yield on the MSCI Russian Index was 4.6% this week and the forward P/E for next year is 4.2%, which is very attractive.”
Even with headline-hogging Russia to contend with, Brazil is still drawing its fair share of investor negativity as internal political unrest and the ongoing Petrobas scandal threaten to de-rail the government’s efforts to stabilise the economy.
However, Will Landers, senior portfolio manager of BlackRock’s Latin American suite, believes that 2015 will see a rebalancing of the Brazilian economy – albeit perhaps not quite to expectations.
“The situation in Brazil has started to improve with ongoing fiscal adjustments from the administration,” he said. “There is still work to be done, but things are moving in the right direction.
“Some of the key risks we identified are being worked on. The Petrobas issue is still an overhang on the market, but the tail-risk of a technical default seems to be going away, which will be positive for Brazil’s ratings overall. Also, electricity rationing does not look like it will happen now.
“However, overall I think the economy will be weaker this year than we thought in January. GDP forecast is -1%, but it will probably be closer to -3%, which will have a negative impact on activity and employment. Also, it still hasn’t filtered through to earnings forecasts, which will probably be downgraded, so Brazil is not as cheap as it looks.
Is there anywhere in Brazil that investors can feel justified in putting their money?
“Financials are the prettiest houses in a not-so-pretty neighbourhood,” said Landers. “They are insulating their balance sheets against risks in the wider economy. Of course, the Petrobas issue could have an impact on corporate loans, but they are trading at a discount to the global market and are doing a good job of controlling costs and increasing fee income.”
Based on both the macro figures and infrastructural development, it appears that China is set to pull away from Brazil, Russia and India altogether.
At least India is exhibiting some signs of trying to keep up, but it is not enough to keep the ‘BRIC’ concept from sinking further into obscurity, and those economies occupying four of the top six places in the GDP table by 2050 is looking increasingly unlikely.
Perhaps we will have more luck with the MINTs and CIVETS.
