Goldman: BRICs are hitting the wall

MAR 14, 2012
By  Bloomberg
In the past decade, mutual funds poured almost $70 billion into Brazil, Russia, India and China, stocks more than quadrupled gains in the S&P 500 and the economies grew four times faster than America's. Now The Goldman Sachs Group Inc. contends that the best is over for the largest emerging markets. BRIC funds recorded $15 billion of outflows last year as the MSCI BRIC Index sank 24%, EPFR Global data show. The gauge, which beat the S&P 500 by 390 percentage points between November 2001 and September 2010, has trailed the measure for five straight quarters, the longest stretch since Goldman forecast the countries would join the U.S. and Japan as the top economies by 2050. “In emerging markets, we're waiting for things to get worse before they get better,” said Michael Shaoul, chairman of Marketfield Asset Management LLC, who predicted in February that developing-nation stocks would fall in 2011. The $845 million Marketfield Fund topped 97% of peers last year, data compiled by Bloomberg show. BRIC indexes may fall another 20% this year, buffeted by the liquidity squeeze stemming from Europe's sovereign-debt crisis, said Arjuna Mahendran, the Singapore-based head of Asia investment strategy at HSBC Private Bank. Nations such as Indonesia, Nigeria and Turkey may overshadow the BRICs in the next five years as they expand from lower levels of growth, Mr. Mahendran said.

BRIC PROFITS LAG

“The slowdown we're seeing in the BRICs will continue for most of the first half,” he said. “Compared to the U.S., corporate profits haven't been that good, as companies face higher wages, higher interest rates and currency volatility, and at best, we'll only start to see the effects of monetary policy loosening in the second half of 2012.” Gross domestic product in the four countries rose in the third quarter of 2011 at the slowest pace in almost two years and Goldman Sachs said last month that their potential economic growth rates have probably peaked because of a smaller supply of new workers. Even as Brazilian and Russian policymakers start to lower borrowing costs, profit growth in the MSCI index will slow to 5% in 2012 from 19% last year, trailing the S&P 500 by 5 percentage points, according to more than 12,000 analyst estimates compiled by Bloomberg.

SLOWER GROWTH

Average economic growth in the BRIC countries will decelerate to 6.1% in 2012 from a high of 9.7% in 2007, according to September estimates by the International Monetary Fund. That would narrow the gap over America's expansion to 4.3 percentage points, the smallest since 2004, the IMF data show. Global GDP may increase 4% next year, restrained by 1.1% growth in the euro area, the data showed. Slowing exports to Europe and government restrictions on real estate investment are curbing expansion in China, the biggest emerging economy. India's growth has been hampered by the fastest interest rate increases since 1935 and the rupee's decline to a record low, which fueled inflation and deterred foreign investment. Brazil and Russia, whose growth during the past decade was spurred by surging commodities demand, have been hurt by falling metals prices and the slowdown in China. The BSE India Sensitive Index led declines among BRIC equity gauges last year, falling 23%. China's Shanghai Composite Index also dropped 23%, while Russia's Micex retreated 18% and Brazil's Bovespa sank 16%. The 21-country MSCI Emerging Markets Index (MXEF) lost 20%, while the S&P 500 remained essentially flat. “In emerging markets across the board, all the numbers are pointing toward meaningfully slower growth” this year, said Rajiv Jain, who oversees about $15 billion as a money manager at Vontobel Asset Management Inc. Longer-term economic growth rates in the BRIC nations are poised to drop as their working-age populations increase more slowly and then eventually shrink, according to a Goldman Sachs report. “We have likely seen the peak in potential growth for the BRICs as a group,” Dominic Wilson, an economist at Goldman Sachs, wrote in the report. Mr. Wilson made the firm's first detailed long-term forecasts for the BRIC nations in 2003, two years after Jim O'Neill, then head of economic research, coined the term. Last year's fund outflows were the biggest on an annual basis since at least 1996, according to EPFR Global. India equity funds recorded about $4 billion of net withdrawals, while China funds lost $3.6 billion. Investors pulled $2.2 billion from Brazil, $326 million from Russia and $5.3 billion from funds that invest in all four of the BRIC countries. The emerging-markets funds tracked by EPFR Global had about $47 billion of outflows, leaving assets under management at about $605 billion. Large fund outflows are a contrarian indicator because they may signal that pessimistic investors have already sold, setting the stage for a trough in share prices, according to Jonathan Garner, the chief Asia and emerging-markets strategist at Morgan Stanley. Emerging-markets stocks probably will outperform U.S. equities this year as central banks in developing countries cut interest rates to stimulate economic growth, said James Paulsen, chief investment strategist at Wells Capital Management.

NOT CHEAP ENOUGH

Compared to the U.S., valuations for BRIC markets don't look cheap enough, said Ok Hye Eun, a fund manager at Woori Asset Management Co., which oversees the equivalent of $15 billion. “BRIC markets won't be an attractive destination for a while because there are still ongoing risks,” he said, citing the prospects of a potential collapse in China's real estate market and the outlook for economic reforms in India. “I see more opportunities in the U.S.”

Latest News

SEC bars ex-broker who sold clients phony private equity fund
SEC bars ex-broker who sold clients phony private equity fund

Rajesh Markan earlier this year pleaded guilty to one count of criminal fraud related to his sale of fake investments to 10 clients totaling $2.9 million.

The key to attracting and retaining the next generation of advisors? Client-focused training
The key to attracting and retaining the next generation of advisors? Client-focused training

From building trust to steering through emotions and responding to client challenges, new advisors need human skills to shape the future of the advice industry.

Chuck Roberts, ex-star at Stifel, barred from the securities industry
Chuck Roberts, ex-star at Stifel, barred from the securities industry

"The outcome is correct, but it's disappointing that FINRA had ample opportunity to investigate the merits of clients' allegations in these claims, including the testimony in the three investor arbitrations with hearings," Jeff Erez, a plaintiff's attorney representing a large portion of the Stifel clients, said.

SEC to weigh ‘innovation exception’ tied to crypto, Atkins says
SEC to weigh ‘innovation exception’ tied to crypto, Atkins says

Chair also praised the passage of stablecoin legislation this week.

Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest
Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest

Maridea Wealth Management's deal in Chicago, Illinois is its first after securing a strategic investment in April.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.