Manager of Allianz RCM BRIC Stars Fund, Michael Konstantinov, has reiterated his belief in the BRIC (Brazil, Russia, China, India) markets, citing their resilience in the face of global economic uncertainty in comparison to the more export-led economies of Europe and the U.S.
Commenting on the long term investment case for BRIC, Michael Konstantinov:
BRIC underperformance
"In 2011 Emerging Markets have been range bound. Up until April the MSCI BRIC outperformed Emerging Markets, since then broader Emerging Markets have fared better. However, both markets have delivered negative returns in 2011. These poor returns were triggered by rising inflation and fears over monetary tightening as well as wider concerns over sovereign debt in the US and Europe, this led to a sell-off across Emerging Markets.
"The lacklustre performance of the BRIC countries should come to an end in the second half of 2011. I believe they are poised for a recovery and we shall see inflation abating and in turn the end of tightening measures. The BRICs should outperform in the remainder of the year due to the compelling valuations on offer, a robust domestic demand story and their incomparable long term growth dynamics.
Valuations
"BRIC economies are very cheap both within a historical and Emerging Market context. In fact, BRIC markets are currently trading at a discount to the broader Emerging Market universe. Both China and Brazil are trading for 2011 on a price/earning ratio (PE) that is below the five year average. Even India, which has been the market which has seen the highest valuation throughout the past years, has come down significantly.
"GDP forecasts for 2011 and 2012 show Brazil and Russia set to grow in the range of 4 to 5 percent* while India and China are predicted to grow between 8 and 9 percent. This is back to pre-financial crisis levels. These factors all demonstrate that the BRIC markets are firmly back on their long term growth path. They remain the best economic growth prospects within Emerging Markets and offer a unique buying opportunity at present."
Domestic demand
"The BRIC economies are home to 42%* of the world's population. Their developing middle class is growing in affluence, creating a strong domestic consumer boom. We are already seeing the domestic demand from the BRIC countries driving global consumer demand as these populations express a growing desire to live, educate and insure themselves to a higher standard.
"A good example of this is the Chinese car market, which is the largest in the world, having surpassed the US 18 months ago*. Car manufacturer, BMW, is now selling more cars to China than any other country worldwide, including the US and Germany. This pattern is similar across all the BRIC markets, showing that this domestic boom in consumption shows no signs of abating and investors in the BRIC economies will reap the rewards.
Long term investment
"I think it is important to remind ourselves that the BRIC countries came through the global economic crisis of 2008 and 2009 quite well. Brazil did not even go into recession in 2009 while India and China continued to grow very strongly in the range of 8 to 9 percent*. Only Russia had a short term set back, but has recovered well and is, again, leading the global growth dynamic.
"As the demand side of these economies is mainly driven by domestic demand, not by exports, they are more resilient to a global crisis. We believe that a renewed risk aversion due to the sovereign debt crisis in Europe or the US, will highlight the resilience of the domestic economies in the BRICs and lead to a re-assessment of investors' equity exposure. Investing in BRICs in this context could be seen as a safer bet than other markets such as Europe and the US, which are more affected by the sovereign debt crisis."
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