Highly profitable export from India
BRICS countries: Two out of five markets are interesting for investors
Have emerging markets been left behind in the Corona crisis or do they offer entry opportunities for investors right now?
Especially in India, but also in China, there are very exciting markets and stocks.
Brazil and Russia are what very investors who have more of a gambler gene and good nerves. And then there is South Africa. An analysis.
The 2020 calendar year has so far been shaped by the Covid 19 pandemic - by unprecedented interventions in everyday life and society as well as by a collapse of the global economy. The financial markets had panicked as early as February and March. Around the globe, the stock markets collapsed by up to 40 percent. “Just get out of the risk!” Was suddenly the motto for the majority of investors after years of bull market.
On the one hand it was said: get out of theresharesthat are seen as offering opportunities in the long term, but also as particularly volatile and correspondingly “risky”. On the other hand, investors - above all professional portfolio managers - took flight from those vulnerable and at risk of fallingCurrencies. In times of crisis, the US dollar, the Swiss franc and the euro serve as “safe havens”, as (relatively) carefree parking spaces for capital, at least for a certain time. Investments in the currencies of many financially weak emerging countries, however, were sold.
The South African rand lost 24 percent against the euro in the past twelve months, the Brazilian real 42 percent, and the chronically problematic Argentina peso as much as 44 percent. This combination of suddenly acute equityand Currency phobia caused catastrophic numbers and moods on the stock exchanges of many emerging countries - and swaths of devastation in many investor portfolios. Is the long-term upturn in the so-called emerging markets, the “up-and-coming markets”, finally over - the dream of booming economic areas beyond the “western” world is over?
Five emerging countries have a combined population of around 3.2 billion
Not at all. However, when looking at emerging markets, of which there are a few dozen (depending on the definition), it is important to differentiate more than ever. The well-known letter abbreviation BRICS stands for five of the most important:B.razily, R.ussland,I.India, the People's RepublicC.hina andS.south africa. This acronym was first put together at the beginning of the 21st century by Jim O'Neill, then chief economist of the American finance house Goldman Sachs, to conceptually bundle four (“BRIC”) - and later five (“BRICS”) - economic areas that appeared to be particularly promising. The BRICS concept is anything but brand new, in many ways, see below, even misleading. Nevertheless, it remains relevant insofar as these five emerging countries on four continents have a combined population of around 3.2 billion. That corresponds to a good 40 percent of all humanity.
However, it would be a mistake to lump this heterogeneous quintet of states together. From today's perspective, two of the five BRICS countries appear attractive to investors, even in times of the pandemic; two more look cheap and correspondingly attractive, but at the same time involve enormous risks; and the fifth in the league, "S" for South Africa, threatens to become a problem exchange for years to come.
The most exciting market is India, the largest democracy in the world
The most interesting big emerging market right now is India. The largest democracy in history with 1.38 billion people has been going through a second phase of extensive supply-side economic reforms under Prime Minister Narendra Modi since 2014. (The first wave of liberalization began in 1991 under his predecessor P. V. Narasimha Rao.) The long-term growth path of the Indian economy lies roughly in the range between five and eight percent, with a few ups and downs.
The momentum is on the downside, for example now, in the wake of the corona crisis. India is ending the largest lockdown worldwide, which is just as devastating for companies, the economy and public finances on the subcontinent as in Germany and elsewhere. Nevertheless, the International Monetary Fund (IMF) in Washington D.C. still forecast a 2020 growth of 1.9 percent in India, when the subcontinent had long since come to a standstillplus two percent. According to the IMF, Germany, on the other hand, had to reckon with minus seven percent - or even worse. Nobody knows that exactly at the moment; In view of the turbulence, the estimates are about as accurate as horoscopes.
India's public finances are relatively orderly and stable. The Reserve Bank of India, India's central bank, currently has foreign exchange reserves of $ 480 billion. This comfortable financial cushion also explains why the Indian rupee only lost three percent of its value (against the euro) in the past twelve months.
For investors: Anyone who wants to invest money in emerging and developing countries is generally well advised to use low-fee index funds (ETFs) or (more expensive) actively managed investment funds. You spread the risk, you diversify. This also applies to India. Around a dozen Indian blue-chip stocks can, however, also be traded on German stock exchanges, mostly as so-called ADRs or GDRs (depository receipts, function like stocks). In particular, the Indian IT sector with global corporations such asInfosys, Wipro orCognizant (with headquarters in the USA) is currently worth a look. The conglomerateReliance Industries (Oil, Chemical, Retail, Telecommunications), India's largest company by market capitalization, is a kind of “proxy” share for the entire economic area. Since the Corona low in March, its share price has risen by more than 60 percent.
Beijing is not ashamed to rely on pure capitalism when it comes to the economy
AlsoChina, where the Covid 19 pandemic started at the end of 2019, continues to offer opportunities - albeit with less than that compared to the similarly populous border neighbor south of the Himalayas. India is a stable democracy. China, on the other hand, manages a balancing act that, for ideologically oriented observers, is at least original. On the one hand, the country, the largest economic area in the world in terms of purchasing power parity, is ruled by a Communist Party in sole power. On the other hand, Beijing is by no means ashamed to rely on pure capitalism when it comes to the economy.
After all, this has worked brilliantly since the late 1970s, when the People's Republic initiated economic liberalization. The economy continues to grow and the country's companies, although export-oriented, benefit from a gigantic domestic market. Even the Covid-19 pandemic, which was initially a hotspot, has so far coped comparatively well economically.
For investors: The leading index Shanghai Composite is currently quoted at the level of November - that of the pre-Corona era. Hong Kong's Hang Seng Index, on the other hand, has only made up part of the losses and offers opportunities. In addition to ETFs, there are conglomerates likeCK Hutichson orJardine Matheson interesting, whose shares still look cheap after significant price drops.
Brazil and Russia are raw material giants
The perspective in is less edifyingBrazil andRussia. In relation to the billions of people China and India and their huge domestic markets, both nations are downright tiny. At the same time, however, both are giants when it comes to resources. Russia has raw material companies likeGazprom, Lukoil, Nornickel, Rosneft orSurgutneftegas; Brazil, for examplePetrobras (Oil) andVale (Industrial metals).
Many of these publicly listed companies are now cheap, or rather: dirt cheap, according to current valuation criteria. It has been almost normal for Russian corporations for years to have price-earnings ratios (based on past and forecast profits) in the single-digit range - and at times below five. So they seem absurdly cheap, at least at first glance.
Of course there is a catch. Because in the emerging markets of Brazil and Russia there is not only a lot of land and many raw materials, but also a lot of muddle between politics and business. Corruption, political influence and bookkeeping creativity are firmly anchored there. Anyone who sends investment capital to South America or Eastern Europe or Siberia is therefore taking enormous risks a priori. He doesn't invest, he speculates.
Alibaba has a higher market capitalization than all Russian stock exchange companies combined
Russia is a dictatorship tailored to President Vladimir Putin. Should he one day flirt with the nationalization of companies, i.e. with expropriation (as in 2003 with the raw materials giant Yukos), then that would be suboptimal for their shareholders. (Of course you could take legal action. Good luck.) This fundamental risk explains the cheap valuation of often highly profitable companies in Russia. The Chinese company Alibaba alone has a higher market capitalization than all Russian listed companies combined.
Brazil, on the other hand, has not contributed to its fame in recent years with bribery scandals. countless politicians involved in the Odebrecht Corporation and Petrobras. As the smart speech goes: Brazil is a country with a great future - and it could always be.
For investors who don't want to miss out on a kick in their portfolio: go ahead. There are a lot of really cheap stocks out there in Brazil and Russia. Whether they are worthwhile in the long term is another question.
In South Africa there is even a threat of bankruptcy
South Africa after all, with around 59 million inhabitants, it is the smallest member of the BRICS Club. Even before the corona pandemic, the economic situation wasRainbow Nation not exactly rosy. Since the end of the apartheid regime in 1994, gloriously fought for by the African National Congress (ANC), the country on the Cape has never really picked up economically. Above all, a fatal combination of incompetence and corruption during Jacob Zuma's ten-year presidency, which ended in 2018, has decisively weakened South Africa - for years to come.
The unemployment rate in Africa's second largest economy after Nigeria was de facto around 30 percent earlier this year (the officially reported rate was a few percentage points lower). The state-owned, thoroughly ailing energy company Eskom has been failing for years in the task of supplying the country with sufficient electricity. Power outages are commonplace in South Africa and are a constant problem for companies. Crime is ubiquitous.
South Africa's growth was minimal even before Covid-19, and per capita incomes stagnated. Cyril Ramaphosa, Zuma's successor as head of state and government, imposed one of the strictest lockdowns in the world on March 26th. Even selling alcohol and cigarettes was a criminal offense. Tourism, an important industry in the Cape, is in a state of shock.
In addition, South Africa has had a chronic budget deficit for years. South African government bonds have been classified as “junk” by all three major rating agencies since the end of March, which is an exclusion criterion for many institutional investors and accelerated the escape from the Rand. State bankruptcy and an associated surge in inflation have become more likely. Many South Africans in poorer regions are already starving; a humanitarian catastrophe looms.
For investors: Johannesburg continues to be Africa's leading financial center. There are a few solid companies whose shares can also be traded in Europe. These include the retailer operating in 15 African countriesShopriteor the holding companyNaspers/Prosus (with a large stake in China's IT groupTencent). In the foreseeable future, South Africa's economy is unlikely to get back on its feet - so be careful!
Michael Braun Alexander is one of the most prominent financial journalists in Germany. He has been writing about the stock market and economics since 1995, including as a correspondent in Mumbai and New York and as a columnist for Bild am Sonntag, and has published numerous books on all aspects of investment (“When money dies”, “So goes gold”, “Really rich”).
The author points out that he is a shareholder in some of the companies mentioned.
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