BRIC Markets To Shine In '09

by Phillip Morton, Investors Offshore.com

03 March 2009

Despite the shaky foundations of the global economy, and heavy losses for emerging market hedge fund investors last year, Allianz Global Investors believes that the economic fundamentals of the 'BRIC' markets (Brazil, Russia, China, India) remain sound, and that these markets are the 'standout economies' in an uncertain world.

“Emerging markets are trading at extremely low valuations and are already discounting a very bleak outlook," commented Fund manager of the Allianz RCM BRIC Stars Fund, Michael Konstantinov. He added:

"Taking a global perspective, Brazil, India and China stand out as markets which we expect to grow during 2009. Brazil is expected to grow somewhere in the range of 1.5 to 2%, India in the range of 5.5 to 6.5%, and China 8%. While the growth rates may not be as exciting as they have been, on a relative basis the BRIC countries are less affected by the global economic slowdown."

“While equity markets in the emerging markets have suffered as a result of the global slowdown, financial systems in the BRIC markets are actually quite resilient. They are not subject to the investment difficulties that banks and financial institutions in the developed world are facing such as toxic assets, troubles in real estate markets and huge over-investments. These markets will of course be affected by the economic slowdown, with a negative effect on non-performing loans, a slowdown in loan growth, and perhaps some margin pressure. However, we are not talking about equity capital being at risk and therefore we believe that in a relatively short space of time these financial systems will be at work again and able to provide credit and liquidity to their economies.

Regarding China, Konstantinov believes that Beijing's substantial economic stimulus plan will eventually pay dividends for the Chinese economy, and ultimately for investors.

“We believe that the very aggressive policy measures taken by the Chinese government (totalling RMB4 trillion (USD585bn) investment for 2009-10, roughly 6.5% of GDP per year) are going to work. While growth slowed significantly in the fourth quarter of 2008, we believe that the quick response by the Chinese authorities will stabilise growth and actually lead to a growth rate of somewhere around 8% in the second half of this year," Konstantinov predicted.

However, Allianz remains "somewhat cautious" when it comes to investment prospects regarding India, although it expects strong domestic demand and greater political certainty following May's election to enhance the country's outlook.

"From an equity market point of view, the forthcoming elections are creating uncertainty. Secondly, India has a current account deficit and is dependent, to a certain extent, on foreign capital inflows, which in the current recessionary environment have slowed down and have led to currency depreciation. However, despite these short-term headwinds, we believe that the Indian economy is quite resilient to the global slowdown because the financial system is in a good shape and the economy is strongly oriented towards the domestic market," Konstantinov observed.

Russia, despite its dependence on commodity prices and cheap global credit, is well placed to withstand the global economic turmoil, Allianz forecasts.

“We believe that Russia will be more resilient to crisis than a decade ago. Over the past decade, Russia has managed to modernise key sections of its economy namely, food, retail, consumer and machinery manufacturing production assets as well as improving other areas, particularly within the state sector. All this means that today, Russia is better prepared to withstand the negative fallout from a possible global recession than it was a decade ago," Konstantinov noted.

Finally, with regards Brazil, Allianz suggests that positive economic growth will be achieved in 2009 driven by the country's' dominant agricultural sector.

"Brazil’s agriculture sector is one of the most competitive in the world due to its unique combination of sun, water, land and energy; for instance, Brazil is one of the largest exporters of beef and poultry in the world. There are four key drivers which suggest a positive trend for food prices: increasing demand in Asia supported by the continued urbanisation trend, biofuel production, reduction in global food inventories, and global climate changes," Konstantinov added. He concludes:

“Although recent months have shown the risks and volatility associated with an investment in emerging markets, and despite the continuous negative outlook of the global economy in 2009, we believe that policy measures initiated by governments in the BRIC countries will start to stabilise the economies and financial markets of those countries during the year. Whilst we don’t want to give too bullish a scenario, we should keep in mind that the market is as cheap as during the Asian and Russian crises – and the current crisis did not originate in the emerging markets. Hence, a lot of negative news is priced into the markets."

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