By Conrad de Aenlle
LONG BEACH, California, April 18 The four large
emerging stock markets known as the BRICs - Brazil, Russia,
India and China - have been left behind in the global rally this
year. For some investors, that could present a buying
The Standard & Poor's BRIC 40 Index, which
comprises 40 large companies that are based in the four
countries and have share listings in developed markets, is down
7.1 percent this year through April 17, lagging the 11.1 percent
gain of the S&P 500 index of U.S. stocks.
The poor run continues the underperformance that the BRICs
have experienced for more than five years. While the S&P 500 has
been setting records, the BRIC 40 remains about 35 percent below
the high it reached in October 2007.
That high was the culmination of a 380 percent rally from
the spring of 2004 that left the BRICs overpriced, a condition
stock sellers have been correcting ever since. Some fund
managers, such as Jonathan Brodsky, co-manager of the Advisory
Research International Small Cap Value Fund, say these markets
have fallen so far that some standout companies are now fairly
valued and worth buying.
To be sure, risks remain. Growth in the four economies has
been sluggish - at least by emerging market standards. There are
only so many airports that China needs and only so much oil and
metal that Russia and Brazil can supply to build them.
But managers like Brodsky and Jeff Urbina, who runs $6.1
billion in emerging market equity portfolios for William Blair &
Co LLC, see opportunities. They point to what they say are great
companies whose share prices may have overcorrected as the
broader BRIC markets sold off.
Eventually, BRIC shares will become broadly popular again,
Urbina says, and investors would do well to get in ahead of that
move with some well-chosen purchases.
SEEK SHAREHOLDER REWARDS
Urbina looks for companies that return profits to investors
through dividends, share buyback programs or reinvestment in
their core businesses. The companies seem to be more prevalent
in consumer sectors than industrial ones, though they can be
found anywhere, he said.
"Retailers can open stores cheaply and make a lot of money,"
he said. "There isn't much capital expenditure, and cash flow is
going to be stable."
The well-positioned companies Urbina likes tend not to be
cheap. One favorite is Companhia de Bebidas das Americas Ambev
, a Brazilian beer and soft-drink producer that
distributes throughout the Western Hemisphere. He called it "one
of the best companies in emerging markets" and considers it
worth buying, despite its high trailing price-earnings ratio of
26, because of its comfortable cash flow and growth prospects.
One of his more bargain-priced selections is phone service
provider China Mobile Ltd. It trades at about 10 times
trailing earnings, compared with an average multiple of 17.5 for
the global telecommunications sector. China Mobile has "a fairly
long runway," Urbina said, meaning it has high growth potential
for years to come thanks to the increasing use of smartphones.
Financial services provide another growth opportunity,
according to Jonas Krumplys, who helps direct $6.7 billion in
emerging markets stock positions as manager of the Ivy Asset
Strategy New Opportunities Fund and a member of the management
team of the Ivy Asset Strategy Fund.
Noting that bank accounts and other consumer financial
products are comparatively rare in India, he recommends ICICI
Bank Ltd. The stock trades at roughly 21 times earnings,
versus 40 for the global financial services sector, and the
bank's 11.5 percent return on equity is significantly higher
than the 7 percent average return on equity for the entire
RESOURCE SHARES HIT HARDEST
If the BRICs have fallen from favor, natural resource issues
have been particularly shunned. They are cheaper, relative to
the broad BRIC markets, than at any point in 13 years, according
to Michael Hartnett, chief investment strategist at Bank of
America Merrill Lynch. He recommended buying BRIC resource
stocks and selling short a broad index of emerging-market
Merrill declined a request to provide ratings on individual
issues, but large BRIC resource companies popular with analysts
include the mine operator Vale SA and the oil producer
Petroleo Brasileiro Petrobras SA, both based in Brazil,
and two Chinese energy producers, Sinopec Shanghai Petrochemical
Co Ltd and CNOOC Ltd.
Another way to profit from the BRICs is to look elsewhere
for bargain stocks that sell into BRIC countries, says Brodsky,
whose fund has outperformed its peers over three years. He
prefers to invest in companies that do big business in BRIC
countries but are based in markets with more reasonable
Brodsky likes China Yuchai International Ltd, a
Singaporean concern that builds engines for Chinese trucks, and
Banco Latinoamericano de Comercio Exterior SA, a
Panamanian trade-finance bank. The bank has a p-e ratio of 10,
making it about one-fourth as expensive as the average financial
services stock, and China Yuchai trades at five times earnings,
one-fifth the multiple of the average cyclical industrial
Brodsky says the BRICs are appealing growth stories for the
long haul, despite lingering political and economic challenges,
and he expects buying opportunities to increase as valuations
continue to shrink.
"We're beginning to see stock prices reflect the fundamental
value of businesses rather than sentiment about what the future
holds," he said. "I don't think there's anything wrong with the