BRICs Show No Death of Equities in Emerging Markets (Update4)

By Michael Patterson
Feb. 12 (Bloomberg) -- The only major stock markets recording gains of more than 8 percent this year are China, Russia and Brazil, and India’s benchmark index is little changed.
That’s enough of a sign that the so-called BRICs are showing a resilience unimaginable in the U.S., most of Europe and Japan.
While the evidence varies among the largest developing nations, there are indications that the consumer hasn’t gone into hibernation just yet, aided by a 4 trillion yuan ($585 billion) stimulus plan in China. Prospects that demand will hold up for Brazilian and Russian metals lifted shares of Cia. Vale do Rio Doce 27 percent this year and OAO Severstal 59 percent.
“I would expect the big emerging markets to do really well in the updraft of the next bull market, which you ought to be postured for right now,” said Kenneth Fisher, the billionaire chairman of Woodside, California-based Fisher Investments Inc., which oversees $28 billion and owns Brazilian and Russian shares.
China’s Shanghai Composite Index rallied 23 percent this year, the biggest advance among benchmark equity indexes worldwide, while Russia’s Micex jumped 18 percent and Brazil’s Bovespa added 8.8 percent, data compiled by Bloomberg show. The Bombay Stock Exchange Sensitive Index slipped 1.9 percent, still the fourth-best performance among the world’s 15 largest markets.
The Standard & Poor’s 500 Index declined 7.7 percent as bank shares tumbled. Europe’s Dow Jones Stoxx 600 Index fell 4 percent, and Japan’s Nikkei-225 Stock Average dropped 13 percent.
Global Recession
The Shanghai index fell 0.6 percent today and the Sensex declined 1.6 percent. The Micex slid 5 percent, while the Bovespa dropped 0.8 percent. The MSCI World Index retreated 0.7 percent.
While the BRICs are off to a promising start, it’s too early to buy shares because valuations haven’t fallen enough to compensate for the risk that the global recession will last longer than investors expect, according to Jason Hepner, a global strategist at Standard Life Investments in Edinburgh.
China’s exports fell the most in almost 13 years last month on slumping demand in the U.S. and Europe. Brazil’s economy may have stalled in the fourth quarter as industrial output tumbled the most since 1992, government data show.
Russia will fall into the first recession since its 1998 debt default after the country’s main oil export blend dropped 69 percent from a July record, according to the Economy Ministry. The ruble’s 16 percent tumble against the dollar this year has pushed up financing costs for Russian companies that owe $400 billion in the next four years, including $100 billion in 2009.
China Valuations
“We need some reassurance in the global growth outlook or we’d need valuations getting to absolute extremes where we felt that any future bad news was already priced in,” said Hepner, who helps oversee about $186 billion at Standard Life. “Neither of those conditions have been met.”
As emerging-market shares sank more than developed-market equities last year, China’s Shanghai index tumbled 65 percent and traded in November at 13.2 times reported profits, the lowest level since Bloomberg began tracking the data in 1997.
The gauge was valued at 17.6 times earnings yesterday after rebounding 32 percent from its 2008 low. Stock transactions on both the Shanghai and Shenzhen exchanges rose to 32 billion shares yesterday, the highest in at least three years, as government stimulus measures lured investors.
China’s Stimulus Plan
“China is already getting out of the bottom,” said Lode Vermeersch, chief investment officer of Shanghai-based KBC Goldstate, which oversees about 4 billion yuan and has been buying Chinese shares since October after moving to a “significantly overweight” position from zero holdings.
Premier Wen Jiabao’s ruling Communist Party unveiled its stimulus plan on Nov. 9 in a bid to bolster growth in the world’s third-largest economy. China’s gross domestic product expanded 6.8 percent in the fourth quarter from a year earlier, down from 9 percent in the previous three months. The package includes spending on low-rent housing, infrastructure in rural areas, roads, railways and airports.
A two-month rebound in China’s Purchasing Managers’ Index, a key gauge of manufacturing activity, is fueling speculation that the government’s efforts to revive growth are working.
“The Chinese have huge amounts of money and big bank accounts and they’re now spending it,” said Jim Rogers, the chairman of Singapore-based Rogers Holdings and author of “A Bull in China: Investing Profitably In The World’s Greatest Market.” “China’s going to come out of this better than most.”
India’s Economic Growth
SAIC Motor Corp., China’s biggest carmaker, climbed 54 percent in Shanghai trading this year as the nation’s vehicle sales topped the U.S. for the first time in January. SAIC Motor is based in Shanghai.
Maruti Suzuki India Ltd. added 18 percent in Mumbai trading as sales rose last month by a record. India’s largest carmaker, which is based in New Delhi, trades for 10.2 times profit, compared with 9.7 times for the Sensex index. The measure slid 52 percent in 2008.
The global recession prompted India’s central bank to cut its key repurchase rate to a record low 5.5 percent, from 9 percent in October, while Prime Minister Manmohan Singh’s government announced a combined $31 billion of stimulus measures to support growth.
India’s economy, Asia’s third-largest, probably will expand 7.1 percent in the year to March 31, the statistics office said this month. That compares with the 0.5 percent global growth rate forecast by the Washington-based International Monetary Fund.
Brazilian Stocks
“India’s economy stands out when so many others are contracting,” said Sandip Sabharwal, chief investment officer at Mumbai-based J.M. Financial Mutual Fund, which manages about $1.2 billion. “The government has responded like others by stimulating the economy, but that apart we are still seeing strong domestic consumption.”
The Bovespa index in Brazil lost 41 percent last year, sending price-earnings ratios as low as 7 in October before a rebound in the nation’s metal producers pushed the ratio to 9.6 as of yesterday.
Vale, the world’s biggest iron-ore producer, climbed as prices for the material used to make steel rebounded from a three-year low in China, where Rio de Janeiro-based Vale gets about 17 percent of its sales. Cia. Siderurgica Nacional SA, Brazil’s third-largest steelmaker, added 27 percent this year.
“Infrastructure spending requires things like iron ore and concrete and all kinds of industrial materials,” said Uri Landesman, who oversees about $2.5 billion as head of global growth and international equities at ING Groep NV’s asset management unit in New York. Brazil is “very long metals and they’re going to be a huge beneficiary,” he said.
Severstal, Mechel
Russia’s steel companies also are rallying on speculation increased infrastructure spending by countries including China will boost profits, said Constantin Demchenko, head of trading at Everest Asset Management in Moscow.
Cherepovets-based Severstal, Russia’s largest steelmaker, rose 59 percent this year while OAO Mechel, Russia’s biggest supplier of coal for steelmakers, added 52 percent.
Both stocks fell more than 80 percent last year and the Micex index tumbled 67 percent as Russia’s central bank drained more than a third of its foreign currency reserves fighting a slump in the ruble. A war with neighboring Georgia and sliding oil prices spurred investors to withdraw at least $290 billion from the world’s biggest energy supplier between Aug. 1 and Feb. 6, according to BNP Paribas SA.
‘Secular Uptrend’
The BRICs, especially China and India, are still in a “secular uptrend” because their populations and economies are growing faster than developed countries, said Robin Griffiths of Cazenove Capital.
Emerging markets are the last to slip into the global recession and will be first to recover as governments in China and other developing countries introduce measures to stimulate their economies, JPMorgan Chase & Co. said today, while HSBC Holdings Plc said a rebound in Asian economies in the second half shouldn’t be ruled out.
“We’re moving from a Western-dominated world into an Asian- dominated world,” said Griffiths, who helps oversee about $15 billion as the chief technical strategist at Cazenove in London. “And at the margin that’s where the growth is even now.”