BRICs Abandoned by Locals

Fund Outflows Reach 1996 High

By Michael Patterson, Julia Leite and Rajhkumar K Shaaw 

The 2.5 million rupees ($45,984) Nirav Vora had in the Indian stock market six years ago have plunged by 72 percent. Now the 39-year-old father of two in Mumbai, who depends on investment income for his livelihood, is plowing money into government bonds.

“The confidence of small investors is rock bottom,” Vora said by phone on Feb. 26. “They have no faith in the markets.”

Vora’s exit from equities is being repeated across the biggest emerging markets as disappointing profits and growing state intervention cause stocks to trail global shares for a fourth year. Trading by Brazilian individuals has dropped to the lowest level since 1999, exchange data show. Russian mutual funds posted 16 straight months of outflows, the most since at least 1996, and withdrawals in India are the biggest in more than two years. Chinese investors emptied more than 2 million stock accounts in the past 12 months.

After amassing unprecedented wealth during 14 years of world-beating economic expansion, citizens of the so-called BRIC countries are losing their appetite for shares even as U.S. households return to stocks. While the Dow Jones Industrial Average (INDU) is trading at an all-time high, the MSCI BRIC (MXBRIC) Index remains 37 percent below its 2007 peak as economic growth disappoints investors and policy makers do little to improve the treatment of minority shareholders.

‘Steady March’

“This is a somewhat steady march to the exit,” Michael Shaoul, the chairman of New York-based Marketfield Asset Management, which is wagering shares in Brazil, India and China will fall, said by phone on Feb. 27.

The four-country MSCI gauge fell 0.3 percent at 10:14 a.m. in London, bringing its 2013 drop to 0.7 percent. That compares with an 11 percent gain for the Dow Average and a 6.8 percent increase in the MSCI All-Country World Index (MXBRIC). The Shanghai Composite Index has climbed 0.4 percent and Russia’s Micex Index (INDEXCF) advanced 2.2 percent. India’s S&P BSE Sensex index is little changed, while Brazil’sBovespa Index (IBOV) has retreated 6 percent.

The last time individuals in Brazil and India were this pessimistic, the nations’ benchmark equity indexes fell more than 10 percent in 12 months, data compiled by Bloomberg show. Local selling hasn’t reached levels of “capitulation” that signal market bottoms, said Shaoul, whose $6.9 billion MainStay Marketfield Fund (MFLDX) beat 99 percent of peers tracked by Bloomberg in the past year.

Relative Valuations

More than 59 percent of companies in the MSCI BRIC index reported quarterly earnings that trailed analyst estimates this year, the fourth-straight quarter of disappointing results. Profits rose less than 1 percent, data compiled by Bloomberg show.

“People domestically can see that the fundamentals of a large part of their investable universe is not very good,” John-Paul Smith, an emerging-market strategist at Deutsche Bank AG in London, said in a Feb. 26 phone interview. “It’s difficult to find stocks you want to own that combine improving fundamentals with attractive valuations.”

BRIC shares trade at the cheapest levels versus global equities since at least July 2009. The MSCI BRIC gauge is valued at 9.2 times 12-month earnings estimates, or about 30 percent less than the multiple of 13 for the All-Country measure, according to data compiled by Bloomberg.

For Peter Dixon, the global equities economist at Commerzbank AG in London, lower valuations signal shares in the biggest developing nations may be poised to rally.

Money Flows

“The time is ripe for these markets to actually rebound a bit,” Dixon said in a Feb. 28 interview on Bloomberg Television.

Domestic money flows are less important than valuations for long-term equity returns, said Plamen Monovski, the London-based chief investment officer at Renaissance Asset Managers. The four-year rally in U.S. stocks suggests markets can advance even as some investors pull out, Monovski said in a Feb. 26 phone interview.

The Dow average, which fell to a 12-year low in March 2009, rallied more than 100 percent through the end of 2012 as domestic equity mutual funds recorded more than $390 billion of withdrawals. U.S. investors only dipped back into shares this year, adding about $20 billion to mutual funds, according to the Investment Company Institute, a Washington-based trade group.

“Who holds the shares is fairly irrelevant, outside of periods when there’s distress or forced selling,” said Monovski, who oversees about $2.8 billion. “It’s more driven by fundamentals.”

Restaurant Owner

In Brazil, declining participation by local investors has foreshadowed equity losses. The proportion of trades by individuals on the Bovespa exchange dropped to a three-year low of 26.4 percent in 2010, before the benchmark index tumbled 18 percent the following year. The rate slid to 17.9 percent in 2012, the lowest level on an annual basis since 1999. The Bovespa gauge fell 11 percent in 2000.

Individuals accounted for 16.6 percent of trading as of March 8, according to data from Sao Paulo-based BM&FBovespa SA, which manages Brazil’s stock exchange.

Romano Allegro, a 57-year-old restaurant owner in Salvador, in northeastern Brazil, grew disillusioned with equities because government decisions hurt his investment in state-run Petroleo Brasileiro SA (PETR3). Romano first acquired stock of Petrobras, as the company is known, through a state asset sale in 2000 and now owns 128 common and six preferred shares.

Investors ‘Scared’

“I started selling my shares because I lost a lot of money,” Romano said in a phone interview. “The fundamental reasons of all this damage, not only for me but for every Petrobras investor, has a name: government intervention. It destroyed the company’s value and, most of all, scared smaller investors on the Brazilian exchange.”

Petrobras common shares have lost 64 percent during the past five years, versus 7.4 percent for the Bovespa. The Rio de Janeiro-based oil producer has dropped to the world’s 46th- biggest company by market value from 8th-largest five years ago.

The Bovespa is retreating faster than any equity gauge in the world’s 20 biggest markets in 2013. Beyond the energy sector, Brazilian PresidentDilma Rousseff has intervened in utilities and banks, threatening profits from Cia. Energetica de Sao Paulo to Banco do Brasil SA. Gross domestic product growth slowed to 0.9 percent last year, the weakest pace since 2009. Economists surveyed by the central bank on March 8 predicted a 3.1 percent expansion this year.

India Funds

Indian equity mutual funds recorded nine straight months of outflows through February, losing about 135 billion rupees ($2.5 billion), according to the Association of Mutual Funds in India. The last time outflows were this big was the second half of 2010, just as the benchmarkSensex (SENSEX) index began a yearlong tumble that wiped out as much as 28 percent of its value.

The S&P BSE Small-Cap Index (BSESMCAP)’s 16 percent retreat this year is another sign of domestic selling, as foreigners tend to invest mainly in the country’s largest companies, according to Marketfield’s Shaoul.

While foreign money managers have plowed $9.4 billion into Indian shares this year on expectations Prime Minister Manmohan Singh’s biggest push in a decade to open up the economy will spur growth, Vora, the investor in Mumbai, said he has lost confidence in government policies.

“People are recovering their money and getting out,” he said.

Slower Growth

India’s GDP expanded 4.5 percent in the three months ended December, the weakest pace in almost four years. The statistics bureau predicted an annual expansion of 5 percent, the lowest in a decade, on Feb. 7.

“The stock market is a gambling den,” said Kishor Bafna, a 42-year-old interior designer who lives in Thane, near Mumbai. Bafna invests ingold, fixed deposits and insurance policies provided by Life Insurance Corp. of India, he said in a Feb. 27 interview. He has between 5 percent and 10 percent of his holdings in shares.

Russian mutual funds have posted outflows of about 12.9 billion rubles ($418 million) during the past 16 months, according to the National League of Management Companies, a trade group in Moscow. State interference in listed companies is driving away local investors, said Dmitry Sukhov, who runs a Moscow-based investment consulting firm that advises individuals on global markets.

The government tightened its grip over the nation’s crude industry last year after state-controlled OAO Rosneft (ROSN) agreed to purchase TNK-BP for about $55 billion to become the world’s biggest publicly traded oil company by volume of production.

Power Sector

OAO MRSK Holding (MRKH), a Moscow-based power distributor, tumbled 46 percent during the past 12 months as President Vladimir Putindelayed tariff increases to slow inflation and signed a decree to combine the company with state-run Federal Grid Co. (FEES), instead of selling shares to private investors as some analysts had anticipated.

Sukhov said he stopped buying Russian stocks about 18 months ago and prefers developed-market companies that trade in Hong Kong, London and New York.

“The Russian economy is becoming less market-friendly,” the 42-year-old said in a March 13 phone interview. “Investors were expecting liberalization of different economic sectors and instead we’re seeing the opposite trend. There’s a sense of disappointment.”

China Stocks

The Shanghai Composite (SHCOMP) has tumbled 31 percent since the end of 2009, the most among the BRIC equity gauges, even as Chinese wealth grew at the fastest pace among the four nations.

Per-capita GDP in the biggest emerging economy jumped 63 percent to a record $6,094 in the three years ended 2012, according to data compiled by the International Monetary Fund and Bloomberg. The BRIC average rose to an all-time high of $8,447 and the countries’ gross national savings also reached record levels after economic growth exceeded the global pace every year since 1998, the data show.

The number of Chinese stock accounts containing funds dropped by about 2.3 million, or 4 percent, to 54.8 million in the year to March 8, according to regulatory data compiled by Bloomberg.

Vivian Zhang, a 29-year-old in Shanghai, withdrew 260,000 yuan ($41,828) from the stock market in December and shifted the money into a fund that invests in global commodities. The S&P GSCI Total Return Index (SPGSCITR) of raw materials has gained 6.9 percent since the end of 2009.

Chinese Premier Wen Jiabao said on March 5 that the country lacks a sustainable growth model as he set an economic expansion target of 7.5 percent for this year, unchanged from 2012, in his final report to the National People’s Congress in Beijing before handing power to his successor Li Keqiang.

More than 60 percent of companies in the Shanghai index that reported annual profits so far this year have trailed analysts’ estimates, compared with 42 percent in the MSCI All- Country gauge, according to data compiled by Bloomberg.

“I am still cautious on stocks,” Zhang said in a phone interview on March 13. “The outlook for economic growth is still murky.”