Don’t write off Brics – they’ve got the tools to beat the crisis

‘I think we have one big advantage this year,’ says Michael Konstantinov, who runs funds investing in the ‘Bric’ nations of Brazil, Russia, India and China. The quartet of emerging countries, whose stock markets suffered so much last year, have the ‘tools’ to fight back he says – even if the global economy takes another turn for the worse.

Peaking inflation in these economies, according to the Allianz RCM Bric Stars fund manager, gives the authorities the scope to use policies to support their economies.

‘We’re actually going to see a significant relaxation of monetary and fiscal policies in the Bric economies which were tightened last year on the back of inflationary pressures going up,’ Konstantinov said in a video interview with Citywire.

Amid concerns that a 2012 rally could be halted by the eurozone crisis that hurt equity markets in emerging economies last year – as investors deemed them too risky –  Konstantinov said:  ‘I’m not saying these countries are independent from what is going on in the global economy but they clearly have the tools and means available to counterbalance any major slowdown in economic activity globally.’

Not everyone shares Konstantinov’s confidence. While there has been praise for some of the Bric authorities’ responses to the crisis of recent years, slowing economic growth and persistent concerns over inflation – particularly in India – have led to criticism of many emerging market central banks.

Other economists too point to limitations on the authorities in the biggest of all emerging markets, China. The People’s Bank, juggling slowing economic growth with the need for stability ahead of a Chinese leadership change later this year, is expected to only make small tweaks to monetary policy. Cuts in the reserve ratios required of Chinese banks are thought more likely than actual interest rate cuts.

And where some economists point to China’s vast reserves should it need quick cash to boost its economy, others say its existing debts mean a 2009-style splurge is unlikely.

Some fund managers argue that emerging market equities are in a sweet spot, having been sold off last year. But yet others are weary that there has been over-exuberance among investors since the start of 2012. So far this year the bulls seem to be winning out.

Among private investors, Bric nations remain by far the most popular place for their money among emerging markets, a survey from Dianomi at the start of this year confirmed.

Konstantinov’s Allianz RCM BRIC Stars fund until recently featured in Citywire Selection. But amid last year’s steep market falls – and although it is likely to outperform during a strong rally – the fund has been outclassed and so lost its place in the list of investment picks.