beyondbrics

Never mind the “next 11″ – 2012 is set to be the year of the four Brics, and the numbers for January bear this out. So says bullish Citi analyst Geoffrey Dennis.

But is this a temporary bout of contrarianism? Beyondbrics takes a look.

First off, the numbers. For 2012 to date, the MSCI Brics index is up 12.2 per cent, ahead of global emerging markets at 8.9 per cent. “This follows a poor year in 2011 and BRIC underperformance v. GEMs since late-2009.”

Fair enough. But as Dennis himself points out, January is often a time “for contrarianism and for rotation plays. It is fairly common for the underperformers of the previous year to ‘come out of the gates quickly’ in the new year and for the outperformers of the previous year to lag.” However, Dennis doesn’t think that this undermines the good start: “There has been a decisive move back into higher-beta markets”.

So which markets are up? “All four Bric markets are in the top eight best performing EMs so far this year, led by India (17.1 per cent), followed by Brazil (14.1 per cent), Russia (11.1 per cent) and China (9.4 per cent)” (See chart below). True, but which are the other four markets in the top eight? Hungary, Egypt, Turkey and Poland – hardly a group to inspire confidence, with, respectively, question marks over IMF help, political stability, balance of payments and the eurozone. Indonesia, something of an EM darling at present, is 14th in the list, behind the global average, but after a good 2011 it is less of a recovery play. India had an awful 2011 – a better 2012 was likely.

Dennis argues that the Brics are “at the forefront of the falling inflation and interest rate trends in EMs – one of our key themes for 2012. All four Bric countries have eased monetary policy recently.” True, but so have Indonesia, Philippines, and Turkey. And Chile. And Thailand. It’s hard to see the Brics necessarily at the forefront – they are part of a trend.

Next up is fund flows. Do the inflows into EM funds of $4.23bn year-to-date point to a strong 2012? Not necessarily. As the numbers show, there is a relatively close correlation of EM fund flows to MSCI performance of 0.71 over the last 11 years. But which number is driving which? Dennis suggests that performance drives flows, not vice-versa. So if markets in 2012 go south, the fund flows should duly follow. If funds are driven by performance, then they are hardly an indicator of things to come.

Lastly, Dennis looks at valuations. Here, he is on stronger territory. “Valuations are supportive. Brics carry lower valuations than non-Bric EMs on all of our metrics; for example, Brics currently trade at 9.6x forward v. 11.9x for the non-Brics.” There is no doubt that on the data given, Bric markets look cheap.

Dennis concludes: “Equity markets seem to have decided that most of the likely bad news for 2012 has been discounted – we agree.” The problem is that it’s the unlikely bad news that tends to hurt markets the most. We’ll see.

Related reading:
12 for 2012: expect an EM equities rally, beyondbrics
Deutsche: if you think 2011 was bad for EM equities, just wait for 2012, beyondbrics
EM equities: buying when there’s blood in the streets?, beyondbrics
GEM bulls look out: here comes a bear, beyondbrics
UBS to EM investors: Stay out, beyondbrics