Investors fled the BRICs last year as Brazil, Russia, India, and China underperformed many of the major emerging markets.UBS analyst Nicholas Smithie and his team believe BRIC’s underperformance can be attributed to three key things:
- BRICs are high beta markets and are highly correlated with one another and other emerging markets and were hurt by the low-risk appetite environment after concerns emerged on Europe, China and the U.S. economy.
- High profile corporate corruption scandals like Sino-Forest in China and the 2G scam in India.
- BRICs have a larger share of energy companies 25 per cent, versus 5 per cent for non-BRIC nations, while the rest of the GEMs are more tech heavy at 20 per cent, compared with 5 per cent in BRICs.
But Smithie says BRIC fundamentals are still strong. For one, they’re growing faster than the other EMs, they have stronger earnings growth, and with the exception of India, the BRICs have strong government balance sheets. China and Russia in particular have strong current account surpluses and limited fiscal deficits.
Moreover, Smithie says emerging market valuations have got cheaper and that their underperformance could reverse if these three things take place:
- Easing inflation and easy monetary policy could see growth recover in the second half of the year which should help markets.
- As recent developments in Europe and weaker economic data fade there will be greater appetite for risk.
- A switch of ‘sector leadership’ from technology to energy – since energy valuations relative to tech is at its lowest level in the last decade barring the low point at the financial crisis.
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