From time to time, Morningstar publishes articles from third party contributors under our "Perspectives" banner. Here, HSBC Global Asset Management discusses the outlook for the BRIC markets in 2012.
Strong earnings forecasts and attractive valuations has bolstered the case for robust returns from the BRIC (Brazil, Russia, India and China) markets in 2012 provided key risks are avoided.
Nick Timberlake, head of emerging market equities at HSBC Global Asset Management, and lead manager of the HSBC GIF BRIC Equity Fund, said: “The compelling fundamentals of these regions remain the same, with the collective BRIC nations notching up a population of more than 2.7 billion people and rising, this represents some 40% of the world’s population. The region is rich in mineral reserves including iron ore, aluminium, copper and gold and also in available land for agriculture. Rising affluence across the BRICs means domestic consumption remains a primary driver of intra-BRIC market trade and these nations are becoming less and less dependent on the developed world.
“While we anticipate volatility during 2012 we believe overall strong returns from BRIC markets do not look unreasonable assuming key risks, such as EU sovereign issues triggering a global recession, are avoided. We see several drivers supporting the likelihood of strong returns, including attractive earnings growth forecasts, valuation discounts and currency appreciation.”
While BRIC markets suffered outflows in 2012, in favour of broader emerging markets, Timberlake anticipates strong growth in these markets, for years to come. He added: “Whilst we advocate exposure to the broader emerging market universe, BRIC funds remain an important way to make tactical allocations to these key markets. As BRIC encompasses the four largest emerging markets, this strategy still has a potentially important role to play within a diversified emerging markets portfolio.”
Philip Poole, global head of macro and investment strategy at HSBC Global Asset Management, added: “Not only are valuations in these global emerging markets looking attractive relative to historical standards where emerging markets are trading at a 25% discount to their long-term average, but we continue to see solid fundamentals and robust economic activity in these economies. In addition, inflation, which had been of major concern last year, has shown signs of moderation.”
BRIC policy makers have being using their monetary powers to erode inflation, allowing a number of BRIC central banks to ease policy in a bid to offset global weakness. An undervaluation of emerging market currencies, most of which depreciated markedly in nominal terms in 2011, provides another important reason to consider exposure to BRIC markets, as appreciation should help boost investor returns. HSBC Global Asset Management believes that valuations are at attractive levels with current prices presenting a potentially good entry opportunity for investors with a long-term investment horizon.
RUSSIA
Russia, currently the HSBC GIF BRIC Equity fund’s largest overweight position, at 31%, appears undervalued by the market at present. It has vast numbers of attractive stocks with low valuations and high levels of profitability in nearly all its key market sectors including energy, materials and financials.
Edward Conroy, co-manager of the HSBC BRIC GIF Russia Equity Fund said: “Valuations in Russia are particularly attractive versus other markets and its own history. For example, we see deep value in the energy sector where the Russian oil industry trades at roughly a 40-50% discount to global and emerging market peers. More than a third of the top 50 BRIC ranked companies are Russian. We believe that recent political concerns have been overdone and we expect some reform initiatives which should be good for the market over the medium term, overall the opportunity for upside looks favourable.”
The potential for better investor returns are bolstered by the supportive long-term investment case, as evidenced in Russia, with its low levels of government and personal debt, an abundance of natural resources and rising investment levels. Russia can also boast of a strong domestic consumption story as a result of a surge in levels of Russian US dollar wages since the turn of the century. As a result it has been enjoying a retail boom, which by global standards is still in its fledgling stage, noted Conroy.
CHINA
The outlook for the Chinese market remains optimistic as valuations remain very low relative to their historic average. A flourishing domestic consumption story continues to thrive as a result of rising urbanisation and a growing middle class with a strong appetite for luxury goods and brands. Presently, at 29%, China represents the second largest weighting in the HSBC GIF BRIC Equity Fund. Timberlake believes fears of a hard-landing in China have been overdone as policy makers have been successfully engineering a soft landing. Inflation peaked in July 2011 and monitary easing started in the fourth quarter, with more expected to come. A global slowdown would hit China’s exports but it is becoming less exposed to this. Preferred sectors include financials, notably insurance firms where valuations look particularly attractive and returns are generally high in a global context.
INDIA
Few can doubt that rising consumer spending is, and will be, India’s primary economic driver going forward given its population is some 1.2 billion and rising. In fact, estimates from the OECD assert that potential growth in India is now nearly 9% and that income per capita has doubled in just over the past decade. India’s economy pulled back in the fourth quarter of last year when figures came in at 6.1%, representing a slowdown from the heady figures of GDP growth in 2010 and 2011 of 9.9% and 7.4% respectively but it looks nowhere near close to stalling. The HSBC GIF BRIC Equity Fund added 9% to the market earlier in the year, making its weighting almost neutral. A number of factors have driven this decision including an overall valuation discount versus its historic average. In addition there are a wide and growing number of attractively valued stocks, particularly those sensitive to interest rates as inflation appeared to peak giving the authorities room to commence monetary easing, of which banks have been a key beneficiary.
BRAZIL
The fund has been gradually closing its underweight position in Brazil and its position now makes up some 17% of the fund as fundamentals improve in the region but its valuations are higher than other BRIC nations and discount to its own history is lower than other markets. However Brazil’s inflation is finally falling but it still remains at elevated levels (6.5%). But most economists are expecting inflation to decline further in 2012. Preferred sectors include financials and consumer discretionary, looking at the latter domestic demand is likely to continue sustaining GDP growth and the monetary easing policy is likely to benefit consumption. In regards to financials, the sector has the most appealing valuations within the region and banks are highly capitalised and profitable.
This article was provided by HSBC Global Asset Management. The views contained herein are those of the author(s) and not necessarily those of Morningstar.
If you are interested in Morningstar featuring your content on our website, please email submissions to UKEditorial@morningstar.com.
