by Stefan Wagstyl, From FT Blog,
The underperformance of Bric equities is becoming an embarrassment for investors who are long – and for analysts who have been promoting the stocks. Not only have Bric shares lagged behind the developed world, they have been outpaced by small emerging markets, from Peru to the Philippines.
But one Bric bull who is sticking to his guns is Jonathan Anderson of Emerging Advisors Group. He says that it’s only a matter of time before Bric equities recover – and some of the headline-making small EMs come under pressure.
As Anderson explains in a note to clients this week, he originally backed the Bric stocks last autumn, forecasting that they would reverse their underperformance of the past three years and start closing the gap with smaller EMs that have done outstandingly well. But since then, as he admits, the Brics have lost another 10 percentage points against two other selected groups – medium-sized EMs and small EMs.
The Brics are the usual crew – Brazil, Russia, India and China; the small economies are an unweighted average of Chile, Colombia, the Czech Republic, Hungary, Malayisa, Peru, the Philippines and Thailand. The mid-sized countries are Indonesia, South Korea, Mexico, Poland, South Africa, Taiwan and Turkey, which fall between the Brics and the small in terms of GDP.
Since January 2010, the gap is eye-popping: the small economies’ markets are up 50 per cent, the mediums are up 23 per cent, while the Brics are down 17 per cent.
But Anderson insists that he is still right to predict a Bric recovery, just a bit out with the timing. So patient Bric bulls will be rewarded.
Anderson says that the Brics came into the 2010 economic recovery with rapid growth when expressed in US dollars, partly driven by the success of post-crisis stimulus measures, notably in China.
But as the surge wore off, the Brics then saw the fastest deceleration in growth, which hit corporate operating leverage in China, India and Brazil. For dollar-based investors, the situation was made worse in Brazil and India by big devaluations. Russian equities fared better because both the growth surge and the subsequent deceleration were milder – and the currency stayed stable.
By contrast, the small country group saw much less of a slowdown in 2011-12 or currency depreciation, creating much better conditions for their companies to maintain earnings growth.
So why can’t the small economies continue to surge ahead? While Eastern Europe has its challenges, the small countries of south east Asia and the Andes are seeing good credit-driven expansion in consumer spending, with debt levels well under control.
The answer, says Anderson, lies in exports, which have been flat in the last two years and show little sign of recovery – “a relative ‘muddle-through’ compared with the secular growth and trade boom of the 2000s”.
The collapse in export growth naturally hits the small export-oriented economies harder than their larger rivals. As the chart above shows, the Brics have seen their collective surplus fall over the past few years, but the rate of decline is stabilising. Not so for the smalls.
Anderson writes:
Summing up, the call is that the major period of dollar deceleration in the BRICs is already behind us … while we’re only in the early stages of dollar deceleration in ASEAN and the Andean economies.
The medium-sized economies are much more of a mixed bag, with some countries looking very solid on the external account – Mexico and Taiwan – and others vulnerable, eg South Korea, Poland and South Africa.
But for the Brics, the message is clear, says Anderson. The bet should come right any time soon.
http://blogs.ft.com/beyond-brics/2013/04/22/bric-equities-their-time-will-come-soon/
Tags: BRAZIL, BRIC, Chile, China, colombia, currency devaluations, emerging economies, emerging market trends, frontier markets, growth deceleration, Hungary, INDIA, Indonesia, Malayisa, mexico, mid-size emerging economies, peru, philippines, poland, russia, small emerging economies, south africa, south korea, taiwan, thailand, the Czech Republic, turkey