Stocks in biggest developing markets lag behind global equities

, Daily Business Review


Stocks in the biggest developing markets are lagging behind global equities for a record third year as faster economic growth proves no lure for investors amid concerns over government interference in markets.

The MSCI BRIC Index of shares in Brazil, Russia, India and China rose 11 percent this year through Dec. 28, trailing the MSCI All-Country World Index by 1.6 percentage points. The trend will probably persist in 2013, according to John-Paul Smith, a Deutsche Bank AG strategist. Mutual funds that invest in BRIC nations have posted $1.65 billion of outflows as Brazilian politicians intervened to cut utility rates, China maintained control of its biggest companies and Russian businesses spent shareholder money on projects favored by the government.

"This whole revolution of going from a socialistic mentality to a market economy mentality is not complete," Mark Mobius, who oversees about $40 billion as the executive chairman of Templeton Emerging Markets Group and has invested in developing countries for more than 25 years, said in a Dec. 12 phone interview from Nairobi. "We're still in the middle of that and have a long way to go."

Stocks of BRIC companies beat global equities by 403 percentage points in the eight years after Goldman Sachs Group Inc. coined the term in 2001, as their economies grew more than threefold. Gross domestic product is now expanding at the slowest rate compared to the rest of the world since 1998. The International Monetary Fund sees average growth in the four countries of 4.5 percent this year, down from 8.1 percent in 2010, compared with 3.3 percent for the world economy.

Volumes Drop

The BRIC index rose less than 0.1 percent at 2:53 p.m. in Hong Kong, while the All-Country measure slipped less than 0.1 percent.

While the BRIC gauge increased this year, the value of shares traded on local bourses fell to a three-year low and the measure is still 36 percent below its October 2007 peak. The outlier is India, where the benchmark BSE India Sensitive Index surged 26 percent as the government responded to the threat of a credit-rating downgrade with its biggest push in a decade to open up the economy to foreign investment.

"Governments typically only carry out reforms when they have their back to the wall," Ruchir Sharma, the New York-based head of emerging-market equities and global macro at Morgan Stanley Investment Management, which oversees about $330 billion, said in a Nov. 29 phone interview. "It's moving in the right direction in some of these countries, but the task is so enormous that I'm not sure it's enough."

Foreign Finance

The drop in stock trading makes it harder for governments to revive growth.

Brazil may face an "equity gap" of more than $1 trillion this decade as companies' financing needs outstrip investor demand for shares, according to the McKinsey Global Institute. Russian Prime Minister Dmitry Medvedev has said a growing securities industry will help the nation diversify its economy away from oil. Chinese companies need funding sources outside the banking system, according to Jeff Urbina, an emerging market money manager at William Blair & Co. India relies on foreign inflows to fund its current-account deficit.

Many investors in BRIC companies prefer to buy shares on overseas exchanges. Brazil's state-run Petroleo Brasileiro SA and Russia's OAO Gazprom are more actively traded abroad than on local bourses, according to data compiled by Bloomberg. The 30- day average value of trades in 10 Russian companies including Gazprom is 62 percent higher in London than the same companies' Moscow-listed shares, the data show.

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