London: Shares of companies from the world’s biggest developing economies are increasingly featuring in global fund portfolios, a possible reason why Bric markets are underperforming in 2010 compared to emerging market peers.
With many conglomerates from Brazil, Russia, India and China no longer limited just to emerging equity portfolios, stocks from the so-called Bric group are starting to move in lock-step with developed market indices.
The Brics are also more highly leveraged to the global economy, with Brazil and Russia two of the world’s biggest commodity exporters.
Those factors, many believe, help to explain why the MSCI Bric index is down 4% this year, similar to developed markets’ 5% losses. Emerging stocks on the other hand are up half a%.
“The Bric countries have a group of large-caps which compare in size quite favourably with developed market firms...if you are a global investor you need these Bric large-caps in your portfolio,” says Martial Godet, head of emerging markets at BNP Paribas Investment Partners, which manages €60 billion in emerging markets.
“So when there is a downside correction globally, it reflects on the Brics.”
Godet names Chinese CNOOC, Brazil’s Petrobras and Banco do Brasil , India’s Reliance, and Russia’s VTB and Gazprom as the kind of large cap Bric stocks global investors tend to buy.
Thomson Reuters data shows Bric beta to developed stocks — the measure of volatility relative to the broader market — at 1.1, having declined steadily from 2.0 in 2006. That indicates they will likely move in line with developed markets.
As the largest, most liquid emerging markets, Bric stocks benefited first in the 2009 rally, with 90%-plus gains, notes Robert Ruttman, equities strategist at Credit Suisse.
But they also suffered the biggest redemptions this year as the euro zone crisis and growing fears of a double-dip recession force investors to pare equity allocations in favour of bonds.
“Brics’ size clearly matters for asset allocation especially in terms of institutional portfolio positioning,” Ruttman said. “We will not see a sustained rally in Bric stocks before the end of the current bull market in bonds.”
Obviously local factors are also an issue tending to depress Bric shares — Brazil’s October elections for instance and capital-raising plans by bellwether stock Petrobras. Chinese shares are down 20% as Beijing tries to slow the economy and housing market.
All this has forced investors to seek value in smaller, less correlated, more domestically-focused markets such as Thailand or Turkey which are up 15-20% in 2010.
This may dismay those who believe the Brics, with a fifth of the world’s gross domestic product, 40% of its population and huge infrastructure projects, are safe investment bets. Long-term, no one doubts the validity of the Brics’ economic story. But the evolution of their markets into global rather than purely emerging assets is a reflection of the paradigm shift investment patterns have undergone in recent years.
For years, investors have bought shares in auto or apparel manufacturers listed in say, Germany, but with exposure to emerging markets. The next logical step for larger institutional players would be to buy shares in emerging companies themselves.
As these companies have grown they have increasingly taken to listing shares overseas, via American Depositary Receipts (ADRs), making them more accessible to smaller investors.
Frances Hudson, global schematic strategist at UK investor Standard Life, says her company holds ADRs of the big Brazilian companies, besides investing locally in China and India.
“A listing in a developed market gives an extra level of reassurance,” she said. “These Bric companies are following the example the big South African companies set earlier. They are global companies for whom domicile is just a convention.”
The downside of course is that these big Bric firms, especially those listed overseas, tend to be commodity, energy or tech firms that are heavily leveraged to global growth.
Almost 40% of MSCI’s Bric index comprises cyclical, growth-sensitive energy and materials. For the Brazilian and Russian indices the ratio is 50 and 60% respectively, versus under 30% for the broader emerging equity index.
No wonder India, where commodities are just a quarter of the market, is outperforming this year — up 5%.
Karol Chrystowski, a fund manager at Renaissance Capital in London says he prefers to get exposure to Russia via locally-focused firms such as grocery chain Magnit. “If you buy Gazprom, you are buying into the Chinese story. Chrystowski says. “If you hold Lukoil you are making a bet on US oil demand. It’s not a play on Russia at all.”