BRIC outlook: False dawn or green shoots?


The prospect of a stable government in India able to push further economic reform is just what foreign investors needed to round off an improving outlook for the world’s four largest emerging economies.

The BRICs — Brazil, Russia, India and China — all now have wind behind their economic sails. It is blowing at variable strengths, to be sure, but it bodes well for the asset class and the world economy for which these countries are now critical, Reuters says. Consider this, with an investor in mind:

China is throwing $586 billion in stimulus at its economy and promises more if needed. It is insistent that it wants 8 percent growth this year.

Brazil‘s economy is driven primarily by global commodity prices, which have started rising. The commodity-tracking Reuters/Jefferies CRB Index .CRB has gained more than 7% so far this month.

Russia is firmly tied to the price of oil and that has been recovering rapidly. Crude is up 30% this year and hit a six-month peak above $60 a barrel on Tuesday.

As for India, look no further than Morgan Stanley’s decision last week to move overweight for the first time following the clear cut political victory of the ruling Congress Party.

“Our economics team expects the decisive election victory by the Congress Party to lead to progress in areas including public finances, acceleration in infrastructure spending, augmentation of government resources through privatization and implementation of de-regulation for the pension funds, banking and retail sectors,” it said in a client note.

That the Congress victory was a pleasant surprise for investors can be seen from the 17% rise on Monday of the BSE Sensex stock index and the 3% gain in the rupee, the largest one-day rise in more than a decade.

“It has been one of the most peaceful and arguably successful (Indian elections) of recent times. That should be good for investors’ confidence,” said John Cleary, chief investment officer of Focus Capital.

The BRIC grouping was, of course, originally an investment marketing concept.

The four countries share a number of factors, including huge populations, relatively untapped potential and the likelihood that they will compete on global terms with the Group of Seven industrial nations within a few years.

But because they arguably have as many differences than similarities, investors over time have tended to allocate between them rather than treating all four as equal.

During the boom years, for example, it was not unusual to find investors favoring, say, commodities-producing Brazil over importer India, with its relatively closed market and large fiscal deficit.

India has had mixed success this year. The Sensex rose a solid but underperforming 26% between year-end and the election results. By contrast, Brazil‘s stocks were up more than 30%, China‘s 45% and Russia‘s 48%.

In dollar terms as measured by MSCI, however, India has fared better.

What brakes there have been on India have been questions about the election and whether a period of political instability would follow the vote.

Those questions have now been answered.

“Foreign investors were worried,” said Bob Parker, vice chairman at Credit Suisse’s asset management arm. The election “has removed uncertainty.”

None of this is to say, however, that the BRICs have a free run ahead of them.

Russia, for example, has yet to clean up its banking sector problems and there is no guarantee that the Chinese stimulus will let Beijing meet its goals.

But the biggest short-term issue facing the BRICs may simply be that they have rebounded so far so quickly.

“The markets have moved a very long way,” said Andrew Milligan, head of global strategy at Standard Life Investments. “There is a large amount of good news in the price.”

Credit Suisse, meanwhile, pared back some of its exposure to China and Brazil in March, using profits from around three months of gains to diversify into other countries in the respective regions.

It likes Korea as a proxy for global economic revival because of its emphasis on industrial production such as ship building and on consumer electronics.

Parker said he expected the BRIC stock markets to give back some of their gains in the short term because they have risen so much this year. But the longer term outlook is good.

“The downside is limited and by September and October the markets will have recovered to higher levels than what we have now,” he said.

India is now part of that mix.