UBS Shows Why Russia, Brazil Stock Bulls Must Think Twiceby
Markets `most crowded' with foreign fund flows, brokerage says
UAE, Taiwan, Philippines among least crowded markets
Russia and Brazil may appear to have the lure of cheap stocks, but calculations by UBS AG show they are already overflowing with foreign money.
The benchmark indexes in these commodity-exporting nations have fallen by more than 50 percent in dollar terms since 2013, prompting investors like Franklin Templeton Investments’ Mark Mobius to search for bargains in Brazilian stocks and Bank of America Corp. to turn bullish on Russia in the past four months.
Even so, a statistical model developed by UBS Securities LLC shows these two markets are carrying the highest level of foreign capital relative to their size, leaving them most “vulnerable” among developing nations to sudden shifts in sentiment, according to Geoffrey Dennis, the head of global emerging-market strategy.
“A bigger risk is what happens on the downside,” Dennis said by phone from Boston on Jan. 25. Markets widely invested in by foreigners are prone to falling the most on bad news, while gaining the least from good news, he said.
The declines in the equity markets of Russia and Brazil have outpaced the retreat in commodities. Even as the Bloomberg Commodity Index lost 2.4 percent since the start of the year, the RTS Index has dropped 3.4 percent and the Ibovespa slid 11 percent by 2:58 p.m. in London.
On the other end of the spectrum, the rankings show the United Arab Emirates, Taiwan and Philippines as the least crowded investment destinations. Using data from UBS, EPFR Global and DataStream, the model scores markets based on two-year cumulative net foreign-capital flows relative to market size. The results are given as deviations from the mean.
UBS itself has had an overweight position on Russia since mid-2015 on expectations Brent crude prices will rebound and trade at an average of $42 a barrel this year. It is underweight Brazil. Overall, the brokerage says emerging nations as a group look attractive after the recent losses.
“The markets are looking oversold,” Dennis said. “I would be looking to buy rather than to sell, unless we see something more serious going on in the global economy.”