Bloomberg News

BRIC Bear Market Not Cheap Enough for Charles de Vaulx’s IVA

May 17, 2012

Want Want China Holdings Ltd. snacks. BRIC companies with the best prospects, such as Want Want China Holdings Ltd., are already trading at high valuations relative to history and peers. Photographer: Nelson Ching/Bloomberg

Want Want China Holdings Ltd. snacks. BRIC companies with the best prospects, such as Want Want China Holdings Ltd., are already trading at high valuations relative to history and peers. Photographer: Nelson Ching/Bloomberg

The MSCI BRIC Index (MXBRIC)’s slide into a bear market has left equities in the biggest emerging economies trading at the lowest levels since 2009 versus global shares.

That’s still not cheap enough for Charles de Vaulx to add a single stock from Brazil, Russia, India or China to his $9.7 billion IVA Worldwide Fund, which beat (IVWAX:US) MSCI’s global gauge by 29 percentage points since its inception in 2008. He’s waiting for further declines of 10 percent to 20 percent before buying.

“For the time being, we have nothing in the BRICs,” de Vaulx said in a May 16 phone interview. “We’re starting to do some work, but we haven’t been willing to pull the trigger.”

The largest companies in Brazil and China are placing the interests of their governments above shareholders, while the rule of law in Russia is too weak for investment and Indian companies face slower profit growth, de Vaulx said. At the same time, BRIC companies with the best prospects, such as Want Want China Holdings Ltd. (151), are already trading at high valuations relative to history and peers, he said.

The New York-based money manager’s concerns help show why stocks in the BRIC nations have fallen further from this year’s peak than in Europe or the U.S., even as the emerging economies expand more than three times faster than developed nations. BRIC equity mutual funds have posted outflows for 10 straight weeks, with investors pulling out about $500 million through May 16, according to data compiled by research firm EPFR Global.

The MSCI BRIC gauge fell 1.1 percent as of 11:28 a.m. in Hong Kong, extending its retreat from a March 2 high to 21 percent. The index closed at 258.78 yesterday, the lowest price versus the MSCI All-Country World Index since January 2009, data compiled by Bloomberg show. The global measure has declined 11 percent from this year’s high. The MSCI Emerging Markets Index is down 16 percent from March 2.

$4 Trillion

Goldman Sachs Group Inc.’s Jim O’Neill coined the term BRIC in 2001 to describe Brazil (IBOV), Russia, India and China. The New York-based bank predicted in 2003 that the countries would join the U.S. and Japan as the world’s biggest economies by 2050.

The worldwide retreat in stocks since March has wiped out about $4 trillion of market capitalization amid concern that Europe’s debt crisis will curb economic growth. Greece faces a fresh election on June 17 that may boost parties opposed to the conditions of its international bailouts. Spanish borrowing costs rose at an auction of government debt yesterday, while Prime Minister Mariano Rajoy said this week the country faces the “serious risk” of losing access to bond markets.

BRIC stock markets are trading at relatively attractive valuations and may rally should oil prices climb or if economic growth picks up in China, said Geoffrey Dennis, Citigroup Inc.’s global emerging-market strategist in New York.

‘Long-Term Values’

“Markets are quite cheap,” he said in a telephone interview. “They’re good long-term values. We’ve just got to wait for individual triggers to come through.”

India may lag behind the other countries because of its “weak fundamentals,” Dennis said. Citigroup reduced its target for the MSCI Emerging Markets Index (MXEF) to 1,100 from 1,225, amid concern over a possible exit by Greece from the euro, the strategist wrote in a note dated yesterday. The developing- market index dropped 1.5 percent to 906.60 today.

The MSCI BRIC index is valued at 1.3 times net assets, lower than the multiple of 1.5 for the MSCI World Index of advanced-country shares and 2.1 for the Standard & Poor’s 500 Index, according to data compiled by Bloomberg.

Negative Correlation

The BRIC countries will probably expand at an average pace of 5.5 percent this year, compared with 1.4 percent for developed countries, according to April forecasts from the Washington-based International Monetary Fund.

That economic growth doesn’t ensure equity gains, according to de Vaulx. He cited a 2004 study by Jay Ritter, a professor at the University of Florida, showing that equity returns were negatively correlated with per-capita gross domestic product growth, based on data from 16 countries from 1900 through 2002.

“It’s wrong to believe that high growth is always good for stocks,” said de Vaulx, adding that he bought emerging-market shares during economic slowdowns caused by the so-called Tequila crisis in Latin America in 1994 and the Asian financial crisis three years later.

Mining Tax

Brazil’s benchmark Bovespa index sank 3.3 percent yesterday, bringing its retreat from a March 13 high to 21 percent. Vale SA, the world’s largest iron-ore producer, and Petroleo Brasileiro SA, Brazil’s state-owned oil company, contributed the most to the index’s retreat yesterday.

Brazilian President Dilma Rousseff has called for higher taxes on mining companies and her administration prompted the ouster of Vale Chief Executive Officer Roger Agnelli last year after criticizing the company for not generating jobs.

“I see things getting worse,” said Michael Shaoul, chairman of New York-based Marketfield Asset Management, whose $1.5 billion Marketfield fund has topped 99 percent of peers this year, according to data compiled by Bloomberg. “We’re perhaps at two-thirds of the bear market.”

Russia’s Micex Index also sank to more than 20 percent below its 2012 high yesterday. The gauge fell 3.5 percent to the lowest level in seven months, led by an 8 percent tumble in OAO Sberbank, the country’s biggest lender.

Russian Funds

While President Vladimir Putin has pledged to make the country’s political process more democratic and strengthen the rule of law, Russians are moving more funds out of the country.

Capital flight reached $42 billion for the first four months of 2012, more than half of last year’s $80.5 billion outflow.

The BSE India Sensitive Index has dropped 13 percent from its Feb. 21 high, with losses for dollar-based investors growing to 21 percent as the rupee weakened to a near record low. A May 14 report showed wholesale price inflation unexpectedly accelerated in April, curbing the central bank’s scope to bolster the weakest economic growth since 2009.

The MSCI China Index of shares available to foreign investors has retreated 14 percent from this year’s high on Feb. 29. Deutsche Bank AG advised investors on May 15 to hold fewer of the nation’s shares than are represented in benchmark indexes, citing the possibility that the government may force state-owned utilities, banks and phone companies to support economic growth at the expense of shareholder returns.

Want Want

De Vaulx said he favors owning companies listed in developed countries that derive some of their revenue from fast- growing developing nations. His fund owns shares of Nestle SA, the world’s biggest food maker, according to data compiled by Bloomberg. The Vevey, Switzerland-based company is valued at 18 times reported profits, according to data compiled by Bloomberg.

That compares with a multiple of 37 for Want Want China Holdings, the country’s largest maker of rice cakes. The Shanghai-based company, which posted 2011 earnings that topped analysts’ estimates after a 31 percent jump in sales, has surged 19 percent this year.

“The real gems, the businesses we would love to own, by and large are not available in the stock market at good prices,” de Vaulx said. “If the market is kind enough to bring those stock prices down, we will be ready to buy.”

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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