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Emerging market investors think the BRICs are back

LiveMint logoLiveMint 19-06-2017 Ben Bartenstein

Resurgent growth is reviving one of the past decade’s hottest trades.

Emerging-market investors are again piling into the so-called BRIC nations—Brazil, Russia, India and China—pushing monthly inflows and stock prices to nearly two-year highs.

The bet is that a pickup in the global economy will fuel demand for the countries’ commodity exports, drive an expansion of middle-class consumption and help them shore up fiscal accounts.

Wooed by India’s efforts to streamline regulations, Brazil’s economic rebound, stabilizing prices for Russian oil exports and China’s stronger currency, traders are warming to the countries’ higher yields and better outlook for equities. It’s an abrupt reversal after they were scorched by a 40% drop in the biggest BRIC exchange-traded fund from the end of 2012 through early 2016 as Brazil lost its investment grade, Chinese growth slowed from a meteoric pace, Russia’s oil revenue plummeted and India’s current account deficit swelled.

“Improving fundamentals, attractive valuations, and high yields in a yield-starved world make emerging markets once again attractive, including some of the BRICs,” Jens Nystedt, a New York-based money manager at Morgan Stanley Investment Management.

Non-resident portfolio flows into BRIC nations rose to $166.5 billion last month, up from $28.3 billion in outflows 12 months prior, according to data compiled by the Institute of International Finance and EPFR Global. Chinese equities saw their biggest quarterly inflows in two years, while traders piled into Indian bonds at the highest level in almost three years, Bloomberg data show.

Mark Mobius, executive chairman of Templeton Emerging Markets Group, favours Brazil, China and India, adding that Russia will also benefit from a growth rebound.

Coined in 2001 by former Goldman Sachs economist Jim O’Neill, “BRICs” became a ubiquitous shorthand for the fastest-growing emerging economies.

In the decade ending 30 December 2012, developing-nation equities had annual returns of 17%, twice those of developed nations. That changed in the taper tantrum years amid fears that the Fragile Five, which included Brazil and India, would struggle to meet high external funding needs. Responding to changing sentiment, Goldman Sachs Group Inc. shut its BRIC fund in October 2015 after losing 88% of its assets since a 2010 peak.

Earlier this year, Goldman signalled its partial return, urging investors to “ stay the course” with a bet on currencies from Brazil, Russia and India. Meanwhile, O’Neill said last month that fears of an economic slowdown in China are “ completely overblown”. To him, the world’s top story remains the rise of emerging-market consumers, led by China’s mushrooming middle class.

In India, measures designed to fuel growth and investment spearheaded by Prime Minister Narendra Modi could remake the country into one of the more dynamic markets over the next several years, according to Charles Knudsen of T. Rowe Price Group Inc. from Baltimore.

The country is expected to reclaim its crown from China as the world’s fastest-growing large economy over the next three years.

Although developing-nation assets rallied over the past year, with stocks surging 25% and currencies gaining about 7%, investors say there’s room for further gains. Bloomberg

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