BRICs Busted as Stocks Diverge Most on Record on Outlook

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Dilma Rousseff and Vladimir Putin
Brazilian President Dilma Rousseff, left, talks with Russian President Vladimir Putin upon his arrival to the 6th BRICS summit in Fortaleza, Brazil, on July 15, 2014. Photographer: Yasuyoshi Chiba/AFP/Getty Images

The BRIC grouping of Brazil, Russia, India and China has never looked so disunited to stock investors.

While Chinese and Indian benchmark equity indexes have surged an average 40 percent this year, Russian and Brazilian gauges posted a mean drop of 4.2 percent. The annual divergence is on pace for the biggest since economist Jim O’Neill coined the term in 2001, leaving the combined market capitalization of Chinese and Indian equities $5.2 trillion larger than that of Russia and Brazil, according to data compiled by Bloomberg.

“From a cyclical point of view, these four countries could hardly be more heterogeneous,” Hartmut Issel, the head of equity and credit for Asia Pacific at UBS Group AG’s wealth-management unit in Singapore, said by e-mail on Dec. 19. “China is slowing gently but still displaying enviable growth, India is starting to pick up, Brazil is in a protracted bottoming process, while in Russia a recession is likely becoming inevitable.”

More than 13 years after the BRIC moniker entered usage to characterize the four nations as a single economic concept, the connection is breaking down. While markets have been buoyed in India after Narendra Modi scored the country’s biggest election victory in three decades, and in China as authorities take steps to keep annual growth above 7 percent, Russia has been battered by sanctions linked to the crisis in Ukraine and Brazil has grappled with an unprecedented corruption scandal involving its state-run oil company.

Marketing Tool

The Shanghai Composite Index and India’s S&P BSE Sensex Index are heading for their biggest annual gains in five years as the countries’ leaders push ahead with measures to boost economic expansion. Brazil’s Ibovespa Index entered a bear market this month as plunging commodity prices threatened the nation’s trade surplus, while Russian shares are poised for an annual loss as President Vladimir Putin battles with a currency crisis.

While the MSCI BRIC index has returned about 274 percent since O’Neill, a former Goldman Sachs Group Inc. economist who’s now a Bloomberg View columnist, predicted in a 2001 research report that the countries’ share of the global economy would increase, the gauge has fallen about 5 percent this year through the close of Asian markets yesterday.

“At the time BRIC was coined it was useful to describe the broad and increasing importance of the four largest emerging-market economies, but it was never suitable as an investing concept,” Mark Gordon-James, a senior investment manager at Aberdeen Asset Management, which managed $526 billion at the end of September, said in an interview on Dec. 18 from London.

Currency Swings

Companies in Russia and Brazil were the biggest drags on the MSCI BRIC gauge this year. They included OAO Gazprom, the world’s biggest natural-gas company by output; OAO Sberbank, Russia’s largest lender; and Petroleo Brasileiro SA, or Petrobras, the Brazilian state-controlled company at the heart of the graft probe. Tencent Holdings Ltd., China Mobile Ltd. and India’s Housing Development Finance Corp. were the largest contributors to gains.

Russia’s Micex slid 3.6 percent at 10:30 a.m. in Moscow, heading for its biggest drop since March. The Sensex lost 0.2 percent, while the Shanghai Composite dropped 0.1 percent at the close from its highest level since January 2010.

Currency volatility has played havoc with foreign investor returns. While China’s yuan and India’s rupee have fallen less than 4 percent versus the dollar this year, the Brazilian real has lost 13 percent and the ruble has slid more than 40 percent.

The combined market capitalization of Chinese and Indian stocks rose to a record $6.4 trillion this month, while Brazil and Russia together slumped to $1.2 trillion, the lowest since at least 2005, according to data compiled by Bloomberg.

Divided Outlook

The outlook for China and India remains favorable relative to the two other BRICs, said Adam Tejpaul, the Hong Kong-based head of Asia investments at JPMorgan Chase & Co.’s private bank unit, which oversees $1.1 trillion. While there may be bargains among Russian and Brazilian shares after the recent losses, the countries’ “weak” economic outlook is a deterrent for investors, he said.

The Micex trades at about 5 times projected 12-month earnings, compared with a ratio of 11 for the Ibovespa, 12 for the Shanghai Composite and 15 for India’s Sensex.

“We are most excited about new governments established in China and India, who have put reforms in place that will benefit the economy and financial markets in 2015,” said Pearlyn Wong, a Singapore-based investment analyst at Bank Julius Baer & Co. “They are also net beneficiaries of weaker oil and commodity prices.”

Subsidy Cuts

Chinese President Xi Jinping, who pledged to give markets a “decisive” role in the $9 trillion economy after coming to power last year, has allowed private investors to take stakes in state-owned firms and started a stock trading link with Hong Kong. Modi, his Indian counterpart, has cut fuel subsidies, allowed more foreign investment in businesses such as defense and promised to narrow the budget deficit.

In Brazil, the corruption scandal at Petrobras, where hundreds of millions of dollars from contracts at the company went to executives, contractors and political parties, according to prosecutors and witnesses, threatens to undermine the political clout of President Dilma Rousseff, who was re-elected in October. Putin, who came to power in 2000, is struggling to prevent the depreciation of the ruble from turning into a banking crisis following the central bank’s decision to raise interest rates to 17 percent this month.

Oil Tumble

The Bloomberg Commodity Index reached a five-year low this month and is down 6.2 percent in December, the sixth straight monthly decline and the longest slump since 2009. Oil has slid 46 percent this year, poised for the biggest drop since 2008.

Falling oil and metal prices may boost economic growth and lower inflation in India and China, two of the world’s three biggest importers of crude in 2013. Commodities account for roughly half of Brazil’s exports, while Russia’s government gets about 50 percent of revenue from energy industries.

The BRIC nations still work as an investment theme, according to Mark Mobius, who oversees about $40 billion as the executive chairman of Templeton Emerging Markets Group, including BRIC equity funds.

“Even with major economies like Brazil and Russia slowing down, emerging-markets growth in 2015 is expected to be comfortably in excess of that achieved by developed markets,” Mobius said by e-mail on Dec. 19. “There are opportunities in all BRIC markets,” although Russian sanctions “create difficulties,” he said.

O’Neill, who stepped down as chairman of Goldman Sachs’ asset management unit last year, says the BRIC grouping should be understood as an economic concept. His colleagues at Goldman Sachs estimated in 2003 that the nations may join the U.S. and Japan as the world’s biggest economies by 2050.

“It just so happens that it became a big investment theme,” O’Neill said by e-mail from London.

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