1st Qtr 2007: BRIC Market Background
Brazil:
- Ministers from Brazil met their counterparts from the US, the EU and India in a bid to accelerate the progress of the ‘Doha round’ of global trade negotiations.
- French retailing giant Carrefour agreed to buy Brazilian retail chain Atacadao in a US$1.1bn deal.
- Brazilian energy group Petrobras is in talks with Japanese trading company Mitsui & Co about supplying Japan with up to 800 million gallons a year of ethanol within four years. In Brazil, the biofuel is generally produced from sugar cane.
- French retailing giant Carrefour agreed to buy Brazilian retail chain Atacadao in a US$1.1bn deal.
- Brazilian energy group Petrobras is in talks with Japanese trading company Mitsui & Co about supplying Japan with up to 800 million gallons a year of ethanol within four years. In Brazil, the biofuel is generally produced from sugar cane.
Russia:
- Mergers and acquisitions in Russia reached record highs in 2006, according to a report from accountancy major Ernst & Young. The value of Russian M&A activity increased by 41% last year to US$71bn.
- UK insurance group Aviva is to set up a direct-sales network in Russia, attracted by the country’s growing wealth. Aviva aims to become one of Russia’s top-five insurers by 2012.
- VTB, Russia’s second-largest bank, unveiled plans for a multi-billion dollar IPO, with listings in Moscow and London.
- UK insurance group Aviva is to set up a direct-sales network in Russia, attracted by the country’s growing wealth. Aviva aims to become one of Russia’s top-five insurers by 2012.
- VTB, Russia’s second-largest bank, unveiled plans for a multi-billion dollar IPO, with listings in Moscow and London.
India:
- Indian IT group Infosys Technologies delivered a 70% increase in quarterly profits, driven by factors including strong growth in outsourcing orders.
- German automobile manufacturer BMW opened its first assembly plant in India to cater exclusively for domestic customers. The move reflects continuing growth in demand in India for luxury goods.
- India’s ICICI Bank announced plans to raise US$5bn in a new share issue.
- German automobile manufacturer BMW opened its first assembly plant in India to cater exclusively for domestic customers. The move reflects continuing growth in demand in India for luxury goods.
- India’s ICICI Bank announced plans to raise US$5bn in a new share issue.
China:
- China has taken the place of the US as Japan’s largest trading partner. Japan’s exports to China in the fiscal year ended March grew by 21% - almost twice the rate of growth of exports to the US.
- Automobile sales increased by 35% in China last year, making it the fastest growing major car market in the world.
- China’s foreign exchange reserves, already the world’s largest, grew to US$1.2 trillion in the first quarter of this year.
- Automobile sales increased by 35% in China last year, making it the fastest growing major car market in the world.
- China’s foreign exchange reserves, already the world’s largest, grew to US$1.2 trillion in the first quarter of this year.
Performance:
The BRIC markets delivered a return of 4.0%* in April in US dollar terms. India delivered the strongest returns among the BRIC markets over the month, with local currency strength having a sizeable positive impact on performance in US dollar terms. Returns from the Brazilian market were also ahead of the BRIC index. The country’s central bank reduced interest rates by 25 basis points to 12.5%, continuing with its policy of monetary easing. Other economic news included the release of data showing Brazil recording a current account surplus of US$817m in March and retail sales growth of 9.4% year-onyear in February. The Chinese market delivered a good absolute return although performance was behind the BRIC index.
The BRIC markets delivered a return of 4.0%* in April in US dollar terms. India delivered the strongest returns among the BRIC markets over the month, with local currency strength having a sizeable positive impact on performance in US dollar terms. Returns from the Brazilian market were also ahead of the BRIC index. The country’s central bank reduced interest rates by 25 basis points to 12.5%, continuing with its policy of monetary easing. Other economic news included the release of data showing Brazil recording a current account surplus of US$817m in March and retail sales growth of 9.4% year-onyear in February. The Chinese market delivered a good absolute return although performance was behind the BRIC index.
Data for the first quarter of the year showed Chinese GDP growth accelerating to 11.1%, fuelled by robust domestic consumption and rising exports. In other developments, the People’s Bank of China continued to tighten monetary policy, announcing two 50 basis point increases in the reserve requirement ratio. Russia was the weakest performing BRIC market . This occurred despite a strong oil price rally in the latter part of the month (the Russian market is dominated by energy-related stocks) and continued evidence of macro-economic strength in consumption and industrial output numbers.
Strategy:
We remain positive on the outlook for the BRIC markets. Our base case scenario is for a soft landing for the global economy in 2007. This mid-cycle pause is expected to be followed by a reacceleration of global growth next year. The emerging economies are also experiencing a shift in the balance of growth towards domestic demand and are likely to continue to deliver growth well above that of developed markets. This strength of the emerging economies, which have become less reliant on US growth, is supporting markets, while valuations are, broadly speaking, not expensive and earnings growth is generally solid.
We remain positive on the outlook for the BRIC markets. Our base case scenario is for a soft landing for the global economy in 2007. This mid-cycle pause is expected to be followed by a reacceleration of global growth next year. The emerging economies are also experiencing a shift in the balance of growth towards domestic demand and are likely to continue to deliver growth well above that of developed markets. This strength of the emerging economies, which have become less reliant on US growth, is supporting markets, while valuations are, broadly speaking, not expensive and earnings growth is generally solid.
The outlook for Russia remains relatively favourable, in our view. Valuations are at reasonable levels and economic growth data continues to be above expectations. As Russia’s economic performance is now based largely on domestic consumer and investment demand, it is somewhat insulated from external shocks (in the absence of a significant fall in oil prices). WTO accession is expected this year and will bring additional economic benefits - it is anticipated that GDP will be boosted by US$19 billion. We are also positive on the prospects for Brazil. Growth statistics are firming, following a period of considerable volatility. The demand side of the economy is particularly strong and, with the expected continuation of monetary policy easing, is likely to remain so. Valuations are attractive and earnings upgrades have been coming through in the materials sector, while non-material sectors continue to display strong earnings growth. We are broadly neutral on the prospects for China. The economy is growing at a faster-than-expected rate (first quarter GDP growth was 11.1%) although further monetary tightening is expected as inflation is picking up. We are finding few stocks which have good upside potential, however, with market valuations at a premium to broader emerging markets. India is our least favoured BRIC market on a shorter-term view although its long-term investment potential remains compelling. Economic growth is strong, but overheating is evident in certain sectors especially real estate and consumer credit. Market valuations have improved and earnings are expected to grow by 20% this year, but there is a risk of downgrades if monetary policy continues to be tightened.
*Source: MSCI: MSCI BRIC index, US dollar terms
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investmentrecommendations.
No comments:
Post a Comment