Emerging-Market Stocks Sink in 2008, May Rebound on BRICs Rally

By Fabio Alves

Jan. 1 (Bloomberg) -- Emerging-market stocks fell the most ever last year and investors are looking for Brazil, Russia, India and China to lead a reversal in 2009.

The global economic slowdown and slump in commodity prices sent the MSCI Emerging Markets Index tumbling 54 percent in 2008, compared with a 38 percent drop in the Standard & Poor’s 500 Index and a 42 percent loss in the MSCI World Index. Developing- nation stocks are trading near their cheapest levels in a decade.

Mark Mobius at Templeton Asset Management Ltd. and Uri Landesman at ING Groep NV are snapping up stocks of the so-called BRICs on speculation global infrastructure spending and interest- rate cuts will help the economies avoid the recessions hurting developed nations.

“Global rate cuts and stimulus plans are going to drive consumption, which most likely will be spent in infrastructure, thus boosting stocks of materials and energy producers of countries like Brazil and Russia,” said Landesman, who oversees $2.5 billion at ING’s asset management unit in New York.

The 746 companies in the MSCI Emerging Markets Index now trade at 8.5 times earnings, up from 6.1 times on Dec. 4, the cheapest in a decade.

The MSCI BRIC Index lost 58 percent last year after demand for oil, steel, iron-ore, soybeans and other raw materials waned. BRIC is an acronym coined by Goldman Sachs Group Inc. in 2001 to encompass the four emerging markets it predicted would join the U.S. and Japan as the world’s biggest economies by 2050.

‘Wonderful Time’

“We’re having a wonderful time buying tremendous bargains,” Mobius, who oversees about $26 billion as executive chairman of Templeton, said in a Bloomberg Television interview on Dec. 24. “As value investors, this is the best time to be investing.”

The worst U.S. housing slump since the Great Depression and credit losses of more than $1 trillion at financial firms worldwide pushed the global economy into a recession, prompting developed countries to cut interest rates and boost spending.

U.S. President-elect Barack Obama said he will increase spending on roads, bridges and public buildings to create 3 million jobs. The European Union disclosed a 200 billion-euro ($278 billion) stimulus proposal for the 27-nation economy. Japan will spend 10 trillion yen ($111 billion) on its economy while China announced a 4 trillion yuan ($586 billion) investment plan after its economy grew in the third quarter at the slowest pace in five years.

“I’m optimistic; I think we’ve taken our medicine,” said Arthur Byrnes, chairman of Deltec Asset Management Corp. in New York, which manages $750 million. “My view is we’ve seen the bottom and things are very cheap.”

Buy China, Brazil

Merrill Lynch & Co. said this month that even as global fund managers started reducing their allocations for emerging-market stocks for 2009, they are increasing those for equities in China and Brazil.

China’s CSI 300 Index, the biggest gainer in 2007 among 89 global stock markets tracked by Bloomberg, slid 66 percent last year, the first annual decline since it was created in April 2005. The index, a benchmark gauge of companies traded in Shanghai and Shenzhen, soared 162 percent in 2007.

Merrill’s global emerging-markets equity strategist Michael Hartnett said most fund managers were planning to buy shares in China and Brazil and sell those in Mexico and South Korea.

China’s CSI 300 index now trades at 12.6 times earnings, down from a peak of 53.2 times in October 2007. The 66 companies in Brazil’s Bovespa index trade at 8.8 times profit after reaching a high of 17.4 times on May 23.

China’s Economy

The World Bank forecasts China’s economy will expand by 7.5 percent in 2009, while the government is targeting 8 percent growth.

“Economic growth in China will be stronger in the second half of 2009 than people are currently discounting, so the outlook for emerging markets in 2009 is very positive,” Landesman said.

Brazil’s stock market is Landesman’s favorite among the BRICs, followed by Russia and China.

The Bovespa index, which lost almost half its value after reaching a record 73,516.81 on May 20, will rebound this year as the Brazilian central bank cuts borrowing costs to boost consumer demand, according to strategists. Banco Santander SA forecasts the Bovespa to rise 30 percent this year to 49,000.

Energy producer Petroleos Brasileiro SA and miner Cia. Vale do Rio Doce, the two largest stocks in the Bovespa, fell 48 percent and 53 percent last year, respectively. Oil and raw material stocks account for 52 percent of the MSCI Brazil Index.

Russia

Russia’s ruble-denominated Micex Index was the worst performing market among the BRICs, losing 67 percent in 2008, as oil prices plunged to below $50 a barrel after reaching a record of $147.27 a barrel on July 11. Oil company OAO Gazprom, Russia’s biggest publicly traded company, plummeted 69 percent.

“We are maintaining an overweight on Russia because of valuations,” State Street Global Advisors Inc. global investment strategist George Hoguet said on Dec. 12. “The economy is facing strains due to oil but valuations are very, very cheap.”

India’s Sensitive index of 30 stocks had its biggest decline since 1980, when the measure began trading, dropping 52 percent in 2008 after climbing 47 percent the year before. ICICI Bank Ltd., the second-largest lender, fell 63 percent as the rupee slumped 19 percent against the dollar.

“If you look at places like China, India, even Russia, which now seems to be having problems, but they all are sitting on huge foreign reserves,” Mobius said. “They have booming economies, and there’s no reason why, going forward, they should not be the first ones to get the attention of investors.”

To contact the reporter on this story: Fabio Alves in New York at falves3@bloomberg.net;

Last Updated: December 31, 2008 18:20 EST