Is it Time to be Bullish BRICs and other Emerging Markets?

Goldman Sachs’ Jim O’Neill is bullish BRICs

From Bloomberg,

The biggest emerging markets are contributing more than ever to the global economy as their proportion of the world stock market shrinks, leaving investors with the widest valuation gap in seven years.

Brazil, Russia, India and China, known as the BRICs, will comprise 20 percent of the world economy this year after growing more than four-fold in the past decade, International Monetary Fund data show. At the same time, their combined stock-market value has dropped to a three-year low of 16 percent of the total invested in equities, according to data compiled by Bloomberg.

To Jim O’Neill, the chairman of Goldman Sachs Asset Management who coined the term BRIC in a 2001 research report, the 4 percentage point difference makes stocks in these markets irresistible. The last time the gap was this wide, in 2005, the MSCI BRIC Index (MXBRIC) jumped 53 percent in 12 months, more than double the gain in the MSCI All-Country World Index. (MXWD)

“Unless we are seeing a major collapse of those economies, it’s a huge opportunity for investors,” O’Neill, who helps oversee $824 billion, said in a June 28 phone interview. The BRIC stock markets may double by 2020 as their share of world gross domestic product increases to about 27 percent, he said.

Combined GDP in the BRICs will rise to more than $14 trillion this year from $2.8 trillion in 2002, according to the IMF. Their equity value, which includes locally-traded shares and companies based in the BRIC nations with primary listings abroad, has dropped to $7.6 trillion from $9.5 trillion a year ago, when they made up 18 percent of the global total, according to data compiled by Bloomberg.

History is not a reliable indicator of the future. Otherwise to paraphrase Warren Buffett, the best investors or the richest people would have been librarians.

Contra O’Neill foreigners have become defensive and have taken the home bias stance.

Again from the same article…

Fund Outflows

Petroleo Brasileiro SA (PETR4), Brazil’s state-controlled oil company, fell to the world’s 39th-largest company by value from the 10th-biggest in July 2011. China Construction Bank Corp. (939)’s rank dropped to 20 from 12 while OAO Rosneft,Russia (INDEXCF)’s largest oil producer, sank to 106 from 70.ICICI Bank Ltd. (ICICIBC), India’s second-biggest lender, has lost 17 percent during the past year, compared with an average gain of 9 percent for global peers.

The retreat has pared what was a 180 percent increase in the MSCI BRIC index since October 2008 and reflects concern that economic growth is slowing, according to John-Paul Smith, an emerging-market strategist at Deutsche Bank AG in London. Mutual funds that invest in BRIC equities, which recorded about $70 billion of inflows in the past decade, have posted 16 straight weeks of withdrawals, losing a net $5.3 billion, EPFR Global data show.

Why?

Downside Risk

While the BRIC economies expanded by 4.8 percent on average during the first quarter, more than double the pace in the U.S., their growth decelerated from 6.8 percent a year earlier.

Falling stock markets suggest the slowdown will worsen because share prices are a leading indicator of economic growth and corporate profits, said Michael Shaoul, the chairman of Marketfield Asset Management in New York. The $2 billion Marketfield Fund (MFLDX) has topped 99 percent of its peers this year in part because of bets that emerging-market shares will retreat.

“Equity markets have started to anticipate much more difficult economic times in these countries,” Shaoul said in a June 28 phone interview from New York. “The balance of risks is to the downside.”

The balance of risks has indeed been to the downside.

Here’s Zero Hedge to prove that point. (bold original)

The sea of red just got even redder as Japan, Korea, Norway, South Africa and Taiwan all dropped below 50, i.e., into contraction territory. From Bank of America: "Overnight and early this morning, a bevy of global manufacturing PMI reports were released. This provides us with an early reading on the state of manufacturing. Out of the 24 countries reporting so far, 10 saw month-over-month improvements in their manufacturing PMIs, while fourteen countries saw their PMIs worsen in June. Seventeen of the manufacturing PMIs were below the 50 breakeven level that divides expansion (+50) from contraction (+50). A majority of the below-50 PMI indices are located in the Euro area. The ongoing sovereign debt and banking crisis continues to weigh on the region’s economic activity and sentiment. The Euro area slowdown is beginning to impact the rest of the world."

I believe this is more than just about the Euro debt crisis, but also of the slowdown (or bubble bust) in China.

So far what has been kept the markets buoyant has been the repeated doping of the markets with minor bailouts and of the torrent of pledges of more bailouts.

In reality, markets remain highly fragile.

As I wrote last weekend

But the dicey cocktail mix of political deadlock, escalating economic woes and the uncertain direction of political (monetary) policies contributes to the aura of uncertainty that may induce a fat tail event.

A recovery in the BRICs and emerging markets will likely be reinforced by a recovery in commodity prices. This has not yet been established.

Until perhaps central bankers of major economies makes major moves, I don’t think the time for positioning on the BRICs is ripe.