Standing apart
from the crowd
Emerging markets, especially BRIC, impact virtually
every investment strategy right now but should
investors place so much reliance on such a strong
consensus? If something looks too good to be true…
BY GARY CORCORAN
There is little doubt that
a long-term investment
theme that few can argue
against is that of the positive
effect of emerging
markets, with the BRIC
countries leading the way.
Dismissed as a marketing
gimmick when the term
was coined in 2001, Brazil,
Russia, India and China
have led the way for equity
investors.
Since Goldman Sachs
brought BRIC to the world,
the MSCI BRIC index has
returned 404% with MSCI
Emerging Markets returning
249%. By comparison,
the FTSE 100 and MSCI
World have provided 34%
and 18% respectively.
The Gross Domestic
Product (GDP) figures also
show the economic shift
from West to East. In 2002,
China’s GDP was 13% of
that of the US; at the end of
last year this had increased
to 33%, and if forecasts from
the International Monetary
Fund (IMF) are correct, this
will increase to 47.5% by
the end of 2014.
Similar forecasts from
the IMF showing GDP per
capita based on purchasing
power parity predict
China’s growing from
$2,880 to $10,989 (a rise of
381%) compared to a 68%
rise in the US, from $39,959
to $53,961.
l Perils of uniformity
Virtually every investment
strategy around the world
will consider the impact of
emerging markets, mainly
China. There is even the
argument that had we not
had the strength and continued
growth from the
Chinese economy over the
past year, the world economy
would have been in
even more dire straits than
it actually is.
But, such a degree of
uniformity and consensus
of opinion around BRIC
and other larger emerging
markets is dangerous – history
is littered with stories
of those who ignored the
adage that says if something
is too good to be true, it
probably is. To quote Mark
Twain: “Whenever you find
yourself on the side of the
majority, it’s time to pause
and reflect.”
Strong economic growth
from these countries is
likely to remain in the
coming years, but that does
not equate to strong stock
markets. It is all about the
price an investor is willing
to pay for the stocks, and
such has been the strength
of the BRIC rise that this
continued growth is already
priced in.
“A lot of emerging
market stocks are moving
to overvalued or expensive
territory. When I was in
Hong Kong [on a recent
research trip], nobody
would tell me the market
was going down,” says
Thomas Becket, PSigma
Investment Management’s
director of investment strategy.
“Everyone felt the
market was fairly valued.”
l Over-pricing fears
This is one of the negatives
surrounding BRIC, that
much of the future good
news is already priced in
with stocks even overpriced
and therefore unattractive
to UK investors.
James Donald, Lazard
Emerging Markets Fund
manager, holds just under
2% in China. “In comparison
with the rest of the
THE CONTRARIAN EMERGING MARKETS
Emerging markets
Relative p’mance of BRIC index – 1 year
-20
Dec ’08 Feb ’09 Apr
Source: Morningstar
3m 6m 1yr 3yr 5yr 10yr
MSCI BRIC 18.69 22.43 81.83 14.13 24.35 12.84
FTSE All Share 5.86 19.74 29.28 -1.66 6.18 1.72
Russell 3000 5.21 17.92 11.48 -3.27 3.06 2.41
MSCI World
Source: Morningstar
5.11 16.39 20.32 -1.82 3.49 -1.64
JANUARY 2010 [www.portfolio-adviser.com] PORTFOLIO ADVISER
100
80
60
% 40
20
0
MSCI BRIC
MSCI World
Jun
Aug
Average performance of BRIC index
FTSE All Share
Russell 3000
Relative p’mance of BRIC index – 3 years
80
60
40
% 20
0
-20
MSCI World
MSCI BRIC
-40
Russell 3000
Dec ’06 May ’07 Nov May ’08
Source: Morningstar
Nov
Oct
May ’09
Dec
FTSE All Share
Nov
39
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