Six adventurous single-country fund ideas

Excitement about the Brics economies may have waned, but there is still compelling potential for impressive gains from individual nations.

The Bric group of countries (Brazil, Russia, India and China) captured investors’ imagination back in 2001 when Goldman Sachs’ chief economist at the time, Jim O’Neill, coined the term. This new investment theme spawned a raft of fund launches, and investors piled in. Then in 2010 South Africa joined the group to turn Bric into Brics.

However, the popularity of the Brics has since waned because of economic uncertainty. Three of the Brics are now included in the ‘fragile five’ – countries Morgan Stanley deems overly dependent on unreliable foreign investment. Assets under management dwindled and fund groups quietly closed their portfolios – even Goldman Sachs, which merged away its fund in 2015.

That said, investors cannot afford to ignore these markets: the five Brics countries together are tipped to account for a third of world GDP by 2020. However, with only a handful of Brics funds now available, single-country funds may be a better way to tap into Brics potential.

Brazil moves to new beat

Latin America’s largest economy and the world’s ninth largest is underpinned by commodities, making it vulnerable to oil price falls. Some lingering effects from the region’s debt crisis of the 1980s are still being felt, with Brazil’s debt-to-GDP ratio set to hit 90%.

Meanwhile, corruption remains a problem. By the time the impeachment of former president Dilma Rousseff began in 2015, Brazil’s economy was halfway through its worst-ever recession. A new far-right president was elected in October 2018 with a mandate for fiscal reform.

Ryan Hughes, head of active portfolios, at AJ Bell, says: “In its recent elections Brazil chose a pro-business president , according to some.” He notes that recent stockmarket performance has been strong, but that Brazil remains out of favour. “Brazil’s market has done incredibly well over the past year, but many investors will have missed out. Fund managers’ allocations to the country have been very low. That said, the new president’s policies could ignite interest in the region. Petrobras issues have dominated, but Brazil is a massive market and a huge economy, and it has a skilled workforce, so there is a lot of potential there if the country can sort out its politics.”

Fund pick: There is a limited choice of Brazil funds, with just three funds in Investment Association sectors. Of these, BNY Mellon Brazil Equity has been the best performer, having returned 140% over three years, according to FE Analytics data. It is managed by Rogério Poppe in line with the group’s focus on capital preservation. The fund has just $88 million (£69 million) under management. It counts banks, miners and, of course, oil giant Petrobras among its top 10 holdings.

There are more Latin America funds to choose from, some of which have heavy weightings to Brazil, and off er diversification through exposure to Chile and Mexico, but these funds come with their own risks. Neptune Latin America had 61% in Brazilian equities at the end of November 2018 and has returned 85% over the past three years. However, Hughes says he would be more inclined to buy a broader emerging market fund for exposure to Brazil.

A table showing how a long-term view may pay off

 

Values attract in Russia

Russia has been making headlines for US election tampering and the poisoning of a former Russian spy and others in the UK, triggering economic sanctions from the West.

Russia’s economy is heavily reliant on exports of oil, gas and other commodities, so investing in its markets requires steely nerve, as these can be highly volatile. However, Russia fund managers say political noise often overshadows the country’s fundamental strengths. They point to cheap stockmarket valuations, a buoyant oil price and Chinese demand for Russian exports.

Hughes says it is difficult to get Russia exposure without buying a single-country fund, but the nature of the market means this comes with significant sector concentration. The Russian stock market is 62% energy, for example, and there is stock-specific risk, with companies such as Rosneft, Gazprom and financials stock Sberbank making up a large part of the index.

“It is a challenging area to invest in,” says Hughes. “People who invest there tell you the stockmarket is incredibly cheap – on very low price-to-earnings (p/e) ratios – but it has been beaten up by political risk. The market is up 80% over three years, so it is not to be sniff ed at, but it fell by 40% when Russia decided to annex Crimea, so it is incredibly volatile and can be swung by politics. You can’t ignore that, no matter how cheap companies are.”

Fund pick: Hughes’s fund pick is Baring Russia run by Michael Levy, who has a long track record of investing in the region. The fund is small (valued at just $38 million), but Hughes says this is unsurprising as “it is hard to see any Russia fund gaining much traction”. He emphasises that a fund such as this should make up only a very small position in most portfolios.

A table showing how volatility is par for the Brics course

 

India a growth hot spot

As he enters his fifth year in office, India’s progressive prime minister Narendra Modi has enacted sweeping tax reforms and attracted record foreign direct investment into the country. India’s services-led economy has overtaken China’s as the fastest-growing in the world. But with a general election coming in May, there is uncertainty about what will happen next.

Adrian Lowcock, head of personal investing at Willis Owen, says: “We’ve had some investor interest in India, as Modi has kept the country’s profile high, but recently it has struggled with a higher oil price and a stronger dollar. The market sold off when the US was sabre-rattling with Turkey.”

Fund pick: A handful of India funds and investment trusts were among the worst performers of 2018. One of these was the £848 million Jupiter India fund, which lost investors 21% in 2018, due to its exposure to underperforming small- and mid-cap stocks.

Lowcock still rates the fund, though. He likes manager Avinash Vazirani’s research-intensive investment process: He says: “Vazirani  conducts his own research and also uses external resources to find ideas. He aims to identify under-researched stocks with strong growth prospects, which has led him to favour mid- and small-cap firms over benchmark heavyweights.

“However, he prioritises capital preservation, so he invests in high-quality companies with strong fundamentals. Investors should be aware that given the unconstrained nature of the portfolio and its large exposure to smaller-cap stocks, the fund can go through short periods of underperformance."

China still tempts

China’s meteoric rise has seen it become the world’s largest economy on some measures, but its growth has been slowing for some time. In the third quarter of 2018, the economy recorded its weakest GDP growth since the peak of the global financial crisis, but it is still on track to grow by 6.6% in 2018.

Known as the workshop of the world, China has become an innovator in its own right and is opening up its marketplace to welcome foreign investors. But it is in a bear market: its CSI 300 index was the biggest loser of 2018, down 25% over the year as investors exited Chinese stocks over the country’s trade spat with the US. Meanwhile, manufacturing has been contracting, although the services sector is picking up the slack.

Lloyds Bank has tipped China as the biggest investment opportunity for 2019, pointing to lower interest on bank loans, a weak renminbi, which could boost exports, and improving trade relations with the EU.

Fund pick: For China exposure, Lowcock tips Fidelity China Focus, managed by Jing Ning using a benchmark-aware approach with a value tilt. He says: “The manager focuses on companies that have been disregarded by the market for economic or company-specific reasons but have the potential for turnaround over the long run. Ning has demonstrated her ability to add value in Chinese equities over the longer term while sticking to her value approach.” The £3.5 billion portfolio counts Tencent, Alibaba and China Mobile among its top 10 positions.

South Africa sounding

South Africa, the latest addition to the Brics group of countries, is known for its natural resources wealth, but it suffers similar struggles with corruption to those faced by other Brics nations. Last year Cyril Ramaphosa took over from Jacob Zuma as president, pledging reform, which has boosted investor sentiment on the country. However, Africa’s second-largest economy still faces structural challenges. Disappointing GDP data saw it fall briefly back into recession last year for the first time since 2009. Despite being home to some well-managed companies, it has struggled with a large current account deficit, a skills shortage and high exposure to the commodities cycle.

Fund pick: Some exchange traded funds track the South African market, and equity funds that invest across Africa are available, but these might be too racy for an average investor. South Africa’s stockmarket performance over recent years has been broadly in line with the wider MSCI Emerging Markets index, so it might be worth buying a general emerging markets fund for less concentrated exposure to South Africa. Templeton Global Emerging Markets, run by Chetan Sehgal, has nearly 10% in South Africa (as at 2 January) and has delivered a top-quartile return of 60% over three years.

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