Bulls stampede to Brazil and China

Investors adopt a bullish stance on emerging markets in general and Brazil in particular, where rising commodity prices, structural reform and inward investment have boosted economic growth.

Emerging markets are experiencing an upturn in popularity, according to both official sources and poll results. As fears over the global economy ease – with a particular focus on Europe – increasingly bullish investors appear to have been lured by the potential growth prospects in emerging markets.

While concerns over eurozone debt soared during the second half of 2011, pressure has since eased as policymakers appear to be making progress. This perceived improvement could arguably have been a catalyst for investors to take on more risk.

The latest Bank of America Merrill Lynch Fund Manager Survey has shown an upwards trend in terms of risk taking for the past two months. In January, the survey revealed that fewer investors suggested the economy would weaken in 2012. The survey’s respondents were also more bullish on the health of corporates and held less cash than they had done in December.

February’s survey continued this trend showing that investors have a more positive outlook for the global economy in 2012. Emerging markets were the beneficiaries of this renewed confidence. The survey shows that a net 44% of respondents are overweight emerging market equities this month, up from a net 20% in January. (AFI continues below)

Commentators are clear on the reasons behind this surge in popularity. Ben Willis, the head of research at Whitechurch Securities and an FE Adviser Fund Index (AFI) panellist, says: “I am not surprised. We have been long-term supporters of emerging markets from a fundamental point of view.

“Because emerging markets had such a difficult time last year they sold down significantly, but now there is a risk-on approach everyone is piling back in,” he adds.

Click to enlarge

Brazil is an interesting case study for emerging markets. Reforms that made Brazil a simpler destination for foreign investors to operate in are encouraging. News that its economy overtook Britain’s last year, jumping to sixth in the world while Britain was relegated to seventh, may have boosted confidence further.

Inward investment in Brazil is on a long-term upward trend (see Fund Strategy, February 20, 2012). The Brazilian central bank says the country attracted total foreign direct investment (FDI) of $661 billion (£420 billion) during 2005-10, which demonstrates a sharp increase from the previous five years.

While the country continues to benefit from rising commodity prices, its central bank faces pressure to keep inflation under control. At a recent conference in London, Aldo Mendes, the deputy governor of monetary policy of the central bank of Brazil, said the central bank’s most important task was to make sure fiscal policy ensures economic stability.

Click to enlarge

“We have to remember that Brazil came from an era of severe hyperinflation [in the 1980s]. It is a priority to make sure the economic environment is stable,” he said.

There are early signs that Brazil might see particularly large inflows in 2012. Luciana Dias, the commissioner of the securities and exchange commission of Brazil, says: “We were really surprised by the levels of inward ­investment for the first month (of 2012). We think stability in Europe was key to this increased investor confidence.”

Another topic for debate is China’s ability to sustain growth. Fears surrounding a potential slowdown in the country were backed by poor economic data at the end of 2011.

Surprisingly, the Merrill Lynch survey shows investors are increasingly confident in China. It found that a majority of 86% suggest the Chinese economy is heading for a soft rather than hard landing.

Only a net 2% of investors in Asia and emerging markets argue China’s economy will weaken in the next 12 months, an improvement from a net 23% who thought the same in January.

Willis says that fund management groups may also be shifting their stance on China.

“Some fund managers which had been very bearish on China, such as those who thought it was oversold and valuations were high, are now saying that the market is starting to look attractive in terms of valuations,” he says.