BRIC now the growth engine of global economy

Courtesy : Moneycontrol

The Brazil, Russia, India, China (BRIC) investment theme continues to remain as strong as ever, believes Allan Conway of Schroders Investment Management. In an interview to CNBC-TV18, Conway said these economies would now be the growth engine of the global economy.

"When we launched the BRIC fund, I told investors: do not worry about short-term volatility, there will be times when markets go down, but the BRIC theme is a theme for your pension fund. You simply put the money in there and over the next five, ten, fifteen years, you will simply make money," he said. "For the foreseeable future, emerging markets will be accounting for 70-75% of global growth and the heart of that growth is the BRIC story. There is still an enormous amount of investment return to be made out of the BRIC theme."

Udayan Mukherjee is saying about the markets

Exclusive interview with Allan Conway on CNBC-TV18.

Q: There has been some confusion about where we are headed with this global markets rally. What is your call, what is happening out there?

A: The rally that we have had so far this year has been extraordinary. But we should remember that we have seen the rally from really oversold levels and whilst we can see many emerging markets are up 50-60% so far this year, many of them are still down 10-15% or more if one looks at the last 12 months. So we were oversold and have had an extraordinary bounceback. But where we are today is still a situation where generally speaking valuations are quite reasonable. We are just starting to finally see visibility of global economic recovery. And as that visibility increases we expect to see equity markets moving into a more sustainable bull market rally. So, whilst in the very near term, it is perfectly possible that we could see some further setback, as we move into the fourth quarter, we expect to see markets come through pretty strongly.
Q: What about the BRIC markets themselves? What kind of liquidity flows do you see into these markets?
A: The BRIC story is phenomenal. As you know that we were the first to launch a BRIC fund and I think we are probably one of the largest BRIC managers today. The reason why emerging markets have come through this crisis so well — which is by the way a big surprise to people — in the past given such a crisis, emerging markets would have suffered even more and what we have seen is that emerging markets generally have come through this crisis in far better shape than the developed economies. And one of the key reasons for that is the BRIC phenomenon. The arrival of these huge populations particularly in China and India having this massive impact, enabling these economies to still show growth despite what is happening in the developed world has really reinforced the whole BRIC decoupling story. And that whole investment theme is as strong as ever. When we launched the BRIC fund, I told investors: do not worry about short-term volatility, there will be times when markets go down, but the BRIC theme is a theme for your pension fund. You simply put the money in there and over the next five, ten, fifteen years, you will simply make money. And even after the setback over the last four-five years, investors have done very well. The BRIC economies are now the engine of growth in the global economy. This year BRICs will account for over 100% of global growth. For the foreseeable future, emerging markets will be accounting for 70-75% of global growth and the heart of that growth is the BRIC story. There is still an enormous amount of investment return to be made out of the BRIC theme.

Q: Having said that, if you look at the fall it has really been India, China, perhaps Hong Kong as a China play leading the fall downwards. What happens now, what exactly is going on at the moment?


A: Yes, the rally that we had starting some months in the spring in March would be termed as having been a bear market rally and it went further and was stronger than we expected. And it was not based on very good fundamentals. So seeing some giveback now is not too surprising and there could be a little bit more weakness over the coming days and weeks. But the key point I think is that as we start to see increased confidence and signs of economic recovery, equity markets generally and particularly emerging markets should then embark on a sustainable bull market rally. The give back over the few days should be surprising. Twice in the last two months we have had 8-10% setbacks, and each time money has come back in. There is a lot of liquidity in the system. A lot of people are still underweight emerging markets generally. So we think the potential for a significant downside from here is limited. And as we approach the fourth we should see the markets rallying again.

Q: What is your view on India itself? We are out of an earnings season. Do you see an increase in earnings visibility? Do you think there is scope for an upgrade in earnings, which might support the underway liquidity rally?

A: India has had a very good crisis as China. The fact that we are looking at 6-6.5% growth in India is terrific at a time when US and Europe is in recession. So, that is very good news. The fiscal situation is not so good as we know, but that has always been the case. On the other hand, the fiscal situation has improved significantly and we hope for further reforms. So the underlying fundamentals broadly in India are pretty good. Not as good as China but nevertheless they are pretty good. The problem with India is once again one of valuations. Here we are again having seen a rise in India and it is now one of the most expensive emerging markets. Now as you point out, earnings growth is strong. Expectations are high there. The consensus is for 30% earnings growth. So the room for further revisions up is going to be limited. And India needs to see this sort of earnings growth to justify the rating that it is on. So we like India in terms of economic fundamentals. We think that the whole situation looks pretty good. But as usual the market is starting to look a little expensive, certainly fully valued. So in our strategy, in our global emerging market fund India is neutral now.



Q: Do you want to sum this up and a couple of investment themes that you are looking at the moment?

A: The themes for India are not massively dissimilar to the theme that one would see in emerging generally. The reason why emerging economies have come through this crisis so well and they have been able to decouple significantly from what has been happening in the developed world are two things: Number one, a significant increase in the importance of domestic demand. This is both in terms of government spending but also corporate spending and also retail or consumer spending. And this rise in domestic demand has been a very important feature of growth in emerging countries generally including India over the recent years. And the other related thing that has changed is the export profile. Today, emerging countries export more to other emerging countries than they do to OECD. Trade between the emerging has become more important. So if one looks at themes, domestic demand is an obvious one, and there are a number of ways that one can get exposure to domestic demand. Banks are obviously a traditional way of getting very good exposure to domestic economy but as do consumer staples and consumer durable plays obviously. And then as we start to move into this global recovery which will be anaemic we believe, it is not going to be a V recovery, it is going to be a U. But then the exporters should start to look a bit better too. But at this stage certainly, domestic related stocks look attractive.

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