Russia cited as most attractively valued of the BRIC economies, according to analysts

Written by Ray Clancy

Wednesday, 11 August 2010 08:26

Russia is the most attractively valued BRIC market but all these economies should continue to prosper from strong domestic consumption, it is claimed.

Strong domestic consumption in Brazil, Russia, India and China (BRIC) is a key driver of continued strength in these markets according to HSBC Global Asset Management, one of the world's largest investors in this asset class with more than $28 billion BRIC assets under management.

Nick Timberlake, head of emerging market equities at HSBC Global Asset Management, says that whilst high debt levels would remain a drag on developed world growth for many years, key emerging economies now have the financial fire power to mitigate the effects of lower export growth through home grown consumption.

He argues that a rising middle class combined with low penetration and pent up demand for goods such as computers, mobile phones and automobiles, has unleashed strong internal demand within these markets.

‘Amid a population of 2.7billion people in the BRIC markets, representing approximately 40% of the world's population, rising affluence is fuelling growing demand for goods. Domestic consumption is also a key driver of intra-BRIC market trade. The BRIC markets are no longer as heavily dependent on the developed world. For example, Brazil’s biggest trading partner is no longer the US but China,’ Timberlake said.

Philip Poole, global head of macro and investment strategy at HSBC Global Asset Management, added that strong domestic consumption is imperative in order for emerging markets to sustain a healthy growth differential relative to the developed world.

‘The good news is that we already have evidence of this and economic policies in markets such as China are increasingly focussed on supporting domestic consumption growth,’ he explained.

HSBC Global Asset Management believes that following a correction within BRIC markets, valuations are now back at fair levels, with current prices presenting a good entry opportunity for investors with a long-term investment horizon.

Russia, currently the HSBC GIF BRIC Equity fund’s largest overweight position, is unloved and undervalued by the market at present, with the stock market trading at just 5x 2011 price earnings. However, with valuations expected to revert in due course, and with the fundamentals remaining sound, the opportunity for upside looks favourable, according to Ed Conroy, co-manager of the HSBC GIF Russia Equity fund.

In China, thriving domestic consumption is being driven by numerous factors, not least rising urbanisation and an emerging and aspirational middle class. Other shifts are also taking place. Recent news of wage increases, although not ideal for China's export competitiveness, should be positive for domestic consumption, Timberlake believes.

Jose Cuervo, manager of the HSBC GIF Brazil Equity fund, argues that sovereign discipline and relevant market reforms over the past 20 years, along with strong global growth over the past decade, have been responsible for fuelling the accelerated economic expansion in Brazil.
Citing a stable sovereign outlook and reduced inflation expectations as examples, Cuervo argues that this has set the platform for Brazil's continued expansion and increased domestic consumption.

‘This has become a more important driver of the economy, a trend that is set to continue, especially given increasing urbanisation levels, favourable demographics, improved access to credit and strong pent up demand,’ Cuervo said.

India remains expensive in emerging market terms at 14.2x calendar 2011 earnings but the economy is in robust shape. Sanjiv Duggal, manager of the HSBC GIF India Equity fund, said he had expected upgrades such as this, and anticipated further upgrades in the next three to four quarters.