BRICs lose their lustre
Despite the growing hype in recent years, investors in the emerging markets should not limit their holdings to the four major BRIC economies, according to PanAgora Asset Management.
The director of macro strategies at PanAgora, David Liddell, said while the BRIC economies, namely Brazil, Russia, India and China, were dynamic and fast growing within the emerging market space, investors should be prepared to consider other economies.
“We certainly don’t argue with the concept that the BRICs are an interesting long-term play … but the MSCI emerging markets index has 25 countries, so why limit yourself to what is essentially four asset classes? Our strategy is to take positions in all of them,” he said.
“In fact, while the BRICs have certainly had a very good run over the last three years, in the last quarter they’ve actually underperformed.”
According to Liddell, the strong bull run in the emerging markets since 2001 has changed it from an asset class that provides additional alpha to one that’s viewed as integral in all portfolio’s as a good diversifier.
“This means emerging markets are no longer the cheap asset class it once was compared to developed markets. The discount seen in the early 2000s has disappeared as it becomes more and more expensive. If we look at the valuations in terms of the price to book, emerging markets are currently 28 per cent higher than the developed markets.”
Also of concern has been the recent sell-offs in the emerging market space in the last five months and the question of whether it has decoupled from the developed markets, said Liddell.
“Since around October, when the emerging markets peaked, the index is down 16 per cent. That has given people pause, but when you think about it relative to developed markets, which are down 13 per cent, the differential isn’t that much.
“When you have a situation with all these sell offs in markets in general, correlations between all asset classes go up, and the emerging market tend to sell up an extreme amount beyond the developed markets, but we’re not seeing that so much and that’s given rise to the decoupling story.
“Our view is, no there hasn’t been a decoupling, and a recession in the US will still have an effect, while not as extreme as in the past.”
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