New York: Emerging market stocks fell the most ever last year and investors are looking for Brazil, Russia, India and China to lead a reversal in 2009.
The global economic slowdown and slump in commodity prices sent the MSCI Emerging Markets Index tumbling 54% in 2008, compared with a 38% drop in the S&P’s 500 Index and a 42% loss in the MSCI World Index.
Growth potential: Templeton executive chairman Mark Mobius says China, India and Russia have booming economies and there’s no reason why they should not be the first ones to get the attention of investors. JC Franca / Bloomberg
Developing nation stocks are trading near their cheapest levels in a decade.
Mark Mobius at Templeton Asset Management Ltd and Uri Landesman at ING Groep NV are snapping up stocks of the so-called Brics on speculation global infrastructure spending and interest rate cuts will help the economies avoid the recessions hurting developed nations.
Global rate cuts and stimulus plans are going to drive consumption, which most likely will be spent in infrastructure, thus boosting stocks of materials and energy producers of countries such as Brazil and Russia, said Landesman, who oversees $2.5 billion (Rs12,175 crore) at ING’s asset management unit in New York.
The 746 companies in the MSCI Emerging Markets Index now trade at 8.5 times earnings, up from 6.1 times on 4 December, the cheapest in a decade.
The MSCI Bric Index lost 58% last year after demand for oil, steel, iron ore, soy beans and other raw materials waned. Bric is an acronym coined by Goldman Sachs Group Inc. in 2001 to encompass the four emerging markets it predicted would join the US and Japan as the world’s biggest economies by 2050.
“We’re having a wonderful time buying tremendous bargains,” Mobius, who oversees about $26 billion as executive chairman of Templeton, said in a Bloomberg Television interview on 24 December. “As value investors, this is the best time to be investing.”
The worst US housing slump since the Great Depression and credit losses of more than $1 trillion at financial firms worldwide pushed the global economy into a recession, prompting developed countries to cut interest rates and boost spending.
US President-elect Barack Obama said he will increase spending on roads, bridges and public buildings to create three million jobs. The European Union disclosed a €200 billion (Rs13.6 trillion) stimulus proposal for the 27-nation economy. Japan will spend 10 trillion yen (Rs18.4 trillion) on its economy, while China announced a 4 trillion yuan (Rs29.28 trillion) investment plan after its economy grew at the slowest pace in five years in the third quarter.
“I’m optimistic; I think we’ve taken our medicine,” said Arthur Byrnes, chairman of Deltec Asset Management Corp. in New York, which manages $750 million. “My view is we’ve seen the bottom and things are very cheap.”
Merrill Lynch and Co.said this month that even as global fund managers started reducing their allocations for emerging market stocks for 2009, they are increasing those for equities in China and Brazil.
China’s CSI 300 Index, the biggest gainer in 2007 among 89 global stock markets tracked by Bloomberg, slid 66% last year, the first annual decline since it was created in April 2005. The index, a benchmark gauge of companies traded in Shanghai and Shenzhen, soared 162% in 2007.
Merrill Lynch’s global emerging markets equity strategist Michael Hartnett said most fund managers were planning to buy shares in China and Brazil and sell those in Mexico and South Korea.
China’s CSI 300 index now trades at 12.6 times earnings, down from a peak of 53.2 times in October 2007. The 66 companies in Brazil’s Bovespa index trade at 8.8 times profit after reaching a high of 17.4 times on 23 May.
The World Bank forecasts China’s economy will expand by 7.5% in 2009, while the government is targeting 8% growth.
Economic growth in China will be stronger in the second half of 2009 than people are currently discounting, so the outlook for emerging markets in 2009 is very positive, Landesman said.
Brazil’s stock market is Landesman’s favourite among the Brics, followed by Russia and China.
The Bovespa index, which lost almost half its value after reaching a record 73,516.81 on 20 May, will rebound this year as the Brazilian central bank cuts borrowing costs to boost consumer demand, according to strategists.Banco Santander SA forecasts the Bovespa to rise 30% this year to 49,000.
Energy producer Petroleo Brasileiro SA and miner Cia Vale do Rio Doce, the two largest stocks in the Bovespa, fell 48% and 53% last year, respectively. Oil and raw material stocks account for 52% of the MSCI Brazil Index.
Russia’s rouble denominated Micex Index was the worst performing market among the Brics, losing 67% in 2008, as oil prices plunged to below $50 a barrel after reaching a record of $147.27 a barrel on 11 July. Oil company OAO Gazprom, Russia’s biggest publicly traded company, plummeted 69%.
We are maintaining an overweight on Russia because of valuations, State Street Global Advisors Inc. global investment strategist George Hoguet said on 12 December. The economy is facing strain due to oil but valuations are very, very cheap.
India’s sensitive index of 30 stocks had its biggest decline since 1980, when the measure began trading, dropping 52% in 2008 after climbing 47% the year before. ICICI Bank Ltd, the second largest lender, fell 63% as the rupee slumped 19% against the dollar.
“If you look at places like China, India, even Russia, which now seems to be having problems, but they all are sitting on huge foreign reserves,” Mobius said. “They have booming economies, and there’s no reason why, going forward, they should not be the first ones to get the attention of investors.”
William Freebairn in Mexico City contributed to this story.