I went on BBC Money Box last weekend to talk about emerging markets. Jim O’Neill, the ex-Goldman guru who came up with the idea that everyone must invest in the Brics (Brazil, Russia, India and China), has given us a new acronym summing up where he thinks we should put our money now – Mint (Mexico, Indonesia, Nigeria and Turkey).
Did I think, asked our BBC host, that this would be a good idea? My answer? Not particularly. Back in the days when everyone went on endlessly about the Brics, Albert Edwards of Société Générale rebranded the idea as Bloody Ridiculous Investment Concept. He isn’t too impressed by Mint either – to him it is just More Irritating New Terminology.
The key point is that there is rarely a link between economic growth and stock-market returns. Quite the opposite. Academics Elroy Dimson, Paul Marsh and Mike Staunton have done endless research on this.
One study of 105 years of markets showed that those based in the countries with the lowest GDP growth beat those with the highest by, on average, three percentage points a year.
Look at a chart of stock-market returns and real GDP across the world from 1900 to 2002 and it is the lower-growth countries that have had the best returns (think Britain, America, Australia and Sweden).
Finally, look to China. Its real GDP growth has been far faster than America’s for the last 20 years (10% against just 2.6%), but has provided almost nothing in terms of equity market returns: you’d have made 9.2% a year in America and a mere 0.4% in China. Why? Because in fast-growing economies, growth itself tends to take precedence over everything else.
If you are focused on gaining market share or on building infrastructure, you don’t tend to make much in the way of profits. At the same time, emerging stock markets are often dominated by state-owned firms (governments often have non-profit objectives), and their regulators aren’t as particular about property and shareholder rights as they might be.
All this tells us that we shouldn’t buy emerging-market stocks unless these factors are priced in. You shouldn’t buy anything unless it is cheap. But you certainly shouldn’t buy emerging-market equities unless they are very cheap indeed.
The good news is that some of the Brics are getting there. Russia is on a forward price-to-earnings ratio of only four times. China is under eight. Both are also displaying slower growth than they were. That combination very often results in good returns. So if you want to be in emerging markets, skip the Mints and buy the last of the Brics.
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