(updated with correction)
Investor sentiment has turned against equity investments in BRICs, the four largest emerging markets, as slowing global growth and the European crisis have dampened performance hopes in the near term.
However, managers are split regarding the outlook for Brazil, Russia, India and China, with some having sold off stocks in these countries while others have seen buying opportunities.
Equity managers cite concerns about each of the four countries, which together make up more than half of the value of stocks in emerging markets benchmarks. Performance within each of the BRICs lagged the overall MSCI Emerging Markets index for the one- and three-year periods ended May 31. Brazil lagged by 823 basis points and 703 basis points, respectively; Russia, by 1,130 and 544 basis points; India, 802 and 785 basis points; and China lagged by 24 and 540 basis points, for the respective periods. China and Brazil slightly outperformed the index over five years.
The emerging markets index trailed the MSCI World index by 934 basis points and 124 basis points over the one- and three-year periods, respectively.
Todd McClone, emerging markets equity portfolio manager at William Blair & Co. LLC, Chicago, said the “big parts of the Brazilian market have been under pressure” from lower commodity prices, the European crisis has pushed down Russian stocks, India is battling inflation and a slowing economy, and China's slowdown might go further than investors believe. “Inflation is dropping, but authorities seem very intent on pushing property prices down,” said Mr. McClone, who recently visited China. Blair runs about $9 billion in regional and global strategies.
The most fundamental and enduring shortcoming of BRIC countries is their belief in “state-driven capitalism,” according to Jonathan Binder, chief investment officer at emerging markets equity boutique Consilium Investment Management LLC, Fort Lauderdale, Fla.
“When governments start to interfere with the allocation of capital, do you believe that's a good thing or a bad thing?” he asked, suggesting that history has shown it to usually be disadvantageous to both country economies and shareholder interests.