According to HSBC Asset Management, the BRIC (Brazil/Russia/India/China) countries are trading at an average discount of 30%. Therefore, this would seem like a good time to revisit investing in BRIC funds. [I love buying things when they are cheap, must be my Scottish blood.]
In terms of five-year averages, the Russian market is the most attractive of the four, it is approximately 40% undervalued. Of the other markets, according to HSBC, China is approximately 35% undervalued, India 21% and Brazil 16%. (All these figures are from Friday 18 May and discounts have widened even further since then as markets have sold off.)
After a horrible 2011 (see chart below), so far this year Emerging Markets have had a sharp rally in Quarter 1, followed by an equally sharp correction in the past few weeks as risk aversion returned towards the end of March.
This has historically been the case in these markets, which have large asset flows from foreign investors who have a tendency to bring their money home when sentiment turns sour.
For this reason, investing in Emerging Markets and BRIC countries will always be a riskier play, Poole admitted, but when Emerging Markets have slid back twice as much as developed markets like the US, they almost certainly bounce back twice as strong once the rally begins.
Poole, who was speaking at a recent event, made it clear that now, when valuations are so depressed, is not the right time to sell out of emerging markets.
Ignore the Naysayers
Nick Timberlake HSBC’s head of equities UK and global head of Emerging Market equities, said:
There is a lot of bearish information out there about what is taking place in the world. Today, uncertainty levels are about as high as they ever get and when this kind of noise surrounds markets often the only thing you can focus on is valuation.
I say the risk reward is very much in your favour investing in a time like this. It is always when you have these moments in time there are 20 reasons that trip off your tongue as to why you should not invest and virtually no reasons apart from valuation when you should do it. Those are always the times you will make money.
Is it time to get in?
Timberlake explained that in the past when Emerging Market valuations have been as low as they are today, the subsequent 12 months have always made investors money.
Following this rationale, timing is clearly key, and longer-term investors should be prepared for inevitable volatility along the way.
What makes now a compelling time to invest in the various BRIC markets,both Timberlake and Poole contend, is the profitability of corporates, which they argue is more correlated to the fate of their respective stock markets than GDP growth.
At the moment companies in the four BRIC nations are trading at an average of 9.3x earnings against a historic average of 13x earnings.
Breaking this down further, Russia is again the cheapest market – trading at 4.3x earnings, while China, Brazil and India are at 8.2x, 8.5x and 12x respectively.
Of the four nations, Russia is HSBC’s favoured market on this basis, while Brazil is its least favourite.
How to Take Advantage
If you have one of the common international/expat savings plans (Generali Vision, Skandia Managed Pension/Savings Account/Zurich Vista) you will have BRIC funds on your fund menu. Be sure to speak to your financial adviser about whether they suit your risk tolerance.
If you have an offshore bond structure (Skandia Executive Investment Bond/Friends Provident Reserve) or just some cash that you want to put to work, then exchange traded funds (ETFs) provide a simple, cheap and liquid way of getting emerging market investment exposure.
[As always, if you have lost your financial adviser or are dissatisfied with the current service that you are getting and wish to discuss whether BRIC funds should be part of your portfolio, feel free to contact us and we will arrange for a UK qualified adviser to get back to you.]