BofA says BRICs are back as it recommends emerging bonds

Bank of America Merrill Lynch (BofA-ML) said investors should buy emerging market bonds and equities as the so-called BRIC nations of Brazil, Russia, India and China post the biggest improvement in growth this year.

“What we’re saying about emerging markets is that the BRICs are back,” David Hauner, head of fixed-income strategy for emerging Europe, the Middle East and Africa, told reporters in Abu Dhabi yesterday.

“Last year a lot of people were saying that the BRICs are finished and of course we had disappointing growth in all of them. Now this year we see a recovery.”

Emerging markets are expected to record economic growth of 5.2 per cent this year, compared with 4.9 per cent last year. The best growth will come from the BRICs, as concern over China’s political transition, Indian currency weakness, and currency appreciation in Brazil wane, Hauner said. The best fixed-income opportunities this year will be in Asia because of its superior growth and links to the U.S. dollar, he said.

“People are getting out of bonds and buying more emerging markets, more high yield but they are selling some Treasuries, we think this makes a lot of sense,” Hauner said. “Our own global asset allocation suggests that you should be overweight equities, overweight emerging market bonds, should be overweight high yield.”

BRIC growth
The BRIC countries grew at an average annual pace of 6.6 per cent from 2001 to 2010, almost twice as fast as the global economy, according to the International Monetary Fund. China is now the world’s second-largest economy in dollar terms, while Brazil is No. 7, Russia is No. 9 and India is No. 10, IMF estimates for 2012 showed in October.

“When you look at our global growth forecast, the biggest jump of improvement really comes from the BRIC economies,” Hauner said. “China is picking up, Brazil is picking up, a lot actually, India and some of the other emerging markets.”

The MSCI BRIC stock index has gained 2.2 per cent in 2013, compared with a 1.7 per cent increase in the broader MSCI Emerging Markets Index.

Brazil’s benchmark Bovespa stock index has declined six per cent this year, while Russia’s Micex Index has gained 2.8 per cent. Yields on Brazilian speculative-grade securities have climbed 0.37 percentage point since falling to a two-year low of 6.44 per cent on January 22, four times the average increase for junk-rated US corporate debt.

Bond yields
Emerging market bond yields fell to 7.3 per cent from 9.3 per cent a year ago, even as net debt rose to a record 3.02 times earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show. Average emerging-market corporate yields have climbed 21 basis points, or 0.21 percentage point, from a more than seven-year low of 7.04 per cent on January 23. Yields for American junk bonds rose 12 basis points to 6.56 per cent.

“You have to become much more discriminating about the individual stories that you look at in individual markets whether it’s equities or in fixed income,” Hauner said, referring to overvalued currencies in Latin America or bonds issued by some of the West Asian countries like Qatar.

Jim O’ Neill, the man who coined the BRIC moniker, said last month that investors seem to have lost interest in the countries. O’Neill, who is stepping down as chairman of Goldman Sachs Asset Management this year, introduced the BRIC concept in a 2001 research report predicting that the nations’ share of the global economy would grow.

The term BRICs appeared in the fewest news stories in January since November 2008, according to data compiled by Bloomberg. BRIC searches on Google’s engine also fell to a seven-year low in December.