6:59 am - Wednesday September 3, 2014

Brazilian Equities Are the Most Vulnerable!

Maarten-Jan Bakkum according, Senior Equity Emerging Market Strategist at ING Investment Management, “the Brazilian government is becoming more interventionist and does little to remedy the structural problems of the country, namely high taxes and low investment in infrastructure and training. It focuses mainly on subsidized cheap credit to stimulate investment growth. The central bank, which lost its independence in recent years, lowers interest rates to a greater extent than is justified by the level of inflation.

“With its new regulations for savings accounts, the government opened the way for further rate cuts. He apparently intends to reduce the base rate (Selic) to 8% in the coming months. This increases the risk of inflation and pressures on the currency. We believe the Brazilian market shares is one of the riskiest emerging markets and is particularly vulnerable in today’s world.

Regarding India, ING Investment Management noted that its market share was largely under pressure and has underperformed that all emerging markets in recent years. Although the year 2012 has started better, the asset manager determines that the market has weakened in the meantime. He said the main problem is political, with a lack of credible reforms which makes both the economy and the stock market vulnerable to capital outflows.

Maarten-Jan Bakkum added that “India has a deficit budget of more than 8% of GDP, while its current account deficit widens. Since the beginning of the year, the rupee was one of the emerging currencies lower. If risk aversion continues to grow worldwide, India is expected to remain under pressure. The decline in oil prices, however, is very good news for the twin deficits and growth prospects. Moreover, the rupee is so impaired that its valuation becomes attractive. Overall, we believe that the Indian market should be able to enjoy a modest return to growth in the coming quarters, while the relatively closed nature of the economy makes the Indian market attractive in today’s world of fragile growth .

Meanwhile, Russian stocks remain very sensitive to oil price fluctuations because Russian exports consist mainly of petroleum products and gas and that the Russian government’s budget is based on the assumption of high oil prices. ING Investment Management noted that few other countries have increased their spending as much as Russia during recent years and given the drop in oil prices, the need for a tax increase is more pressing.

Maarten-Jan Bakkum according, “one of the main risks for the Russian equity market is the government’s willingness to increase tax revenues, particularly from companies in the energy sector and mining. If oil prices continue to fall once (which is quite possible because of poor prospects for global growth and the willingness of OPEC to bring oil prices below U.S. $ 100 per barrel), the Russian ruble should also yet to depreciate further. This makes the Russian equity market particularly vulnerable in the short term. In the longer term, the low valuation of the market remains a good reason not to show too negative.

Finally, ING Investment Management said that the Chinese stock market continues to suffer. After fears of inflation of 2010 and the second half of 2011, there was a sharp rise in concerns about growth and asset manager believes that the expectations of economic growth for China are still too high.

Maarten-Jan Bakkum concluded “that because of the slowdown in the housing sector, prospects remain relatively low for investment in infrastructure, large pressures on export demand AND the emphasis placed by the authorities on the reducing imbalances in the economy, there is little room for growth acceleration. In addition, longer-term fears for greater intervention by the state in the business sector and relatively low profit margins of Chinese companies remain negative factors for the stock market. We therefore opt for caution. The main reason prompting us to not be openly negative towards Chinese stocks is the easing of economic policy that began last October.

 

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