Emerging stock markets – once the favorite for many investors – have been left behind in the recent global rally. But some investors say now may be the time to look for diamonds in the dust.
The four largest emerging market countries, Brazil, Russia, India and China, known as BRIC, may offer some buying opportunities. Jim Awad is Chairman of Plimsoll Mark Capital says to find those targets, investors must drill down past the country’s borders and look for standout companies,
“You absolutely have to look at the geography of the country,” he said. “Is there good governance? Is their corruption? Is the country dependent solely on exports or do they have a rising middle class? You want to screen out based on those factors and then within the countries go to growth companies not dividend companies. You want growth companies that cater to the increasing wealth of the growing middle class.”
One measure of BRIC performance is the Standard & Poor’s BRIC 40 Index (BIK). It contains 40 large companies from those four countries whose shares trade in developed markets, including the NYSE Euronext, the Hong Kong Stock Exchange, the London Stock Exchange and the NASDAQ OMX.
While the S&P 500 has been setting records this year, the BRIC 40 is about 35 percent below the high set in October 2007. That plunge has created some attractive valuations, such as China Mobile.
Portfolio manager Jeff Urbina at William Blair & Co. likes the phone-service provider because it trades at a bargain 10 times trailing earnings compared to the industry average of 17.5.
China Mobile may see high growth from the increased use of smartphones among the growing middle class. It is a company and a trend that also captured the attention of Ron Shah, managing partner of Jina Ventures.
“See our belief is that over the next decade we are going to see a billion new consumers being born, coming into the middle class,” said Shah. “That is an enormous opportunity that can’t be neglected. So we are looking at an industry by industry perspective. We love technology and we love health care.”
He said health care is one of the first places these new consumers will spend their money. In that sector he likes WuXi Pharma from China.
Financial services companies may also benefit from the growing middle class.
There, Shah likes India’s HDFC and ICIC banks. “India is set for a rally. 2014 is when they have their big election and that should break through some of the barriers they have been facing.”
S&P Capital IQ’s Alec Young says one downfall of BRIC countries is they are tied to what’s happening in the developed world: demand for exports, commodities, and the like. “You’re really not getting that much exposure to domestic secular consumer growth or infrastructure growth,” he said. “You need to go into the smaller emerging markets, like Indonesia, Colombia, Peru; Mexico. We’re seeing much better equity performance there.”
Risks remain for investing in the BRICs. Brazil and India face inflation. China is in a slowdown, and Russia’s dealing with volatile commodities. But some careful investing can still uncover buying opportunities.
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