Investment by acronyms makes no sense; Albert Edwards of Société Générale has renamed the Brics a “Bloody Ridiculous Investment Concept
January 16, 2014 Leave a comment
Last updated: January 14, 2014 11:26 pm
Investment by acronyms makes no sense
By James Mackintosh
Lower prices can prove to be value traps
Albert Edwards of Société Générale thinks everything is overvalued – even popular acronyms. A look at the performance of the past few years suggests he has a point.He has renamed the Brics a “Bloody Ridiculous Investment Concept”. Admittedly, anyone who put their dollars into the index of Brazil, Russia, India and China shares when it bottomed in late 2008 could have initially ignored such criticism: in two years, they made 180 per cent, including dividends, against 65 per cent in the developed world.
But the relative gains have now entirely unwound. Last week, returns on developed equities since the 2008 low overtook the Brics, where share prices have been falling.
Investing by acronym makes little sense. Even so, the Mint countries of Mexico, Indonesia, Nigeria and Turkey have suddenly gained prominence, thanks to Jim O’Neill, who had coined the “Bric” term when at Goldman Sachs. Fidelity was behind “Mint” in May 2011, but anyone who decided to suck it and see will be wishing they had listened to Mr Edwards’ interpretation: “More Irritating New Terminology”. Turkey’s lira and Indonesia’s rupiah have both plunged 30 per cent.
Brave investors should see lower prices as an opportunity, not a threat. Emerging markets as a whole are looking slightly cheap at 10 times forward earnings. Russia, at just over 4 times, remains a geared play on the oil price spiced by corporate theft. But both Turkey and China’s Shanghai Composite index trade below eight times forward earnings.
The danger is that both are value traps. China’s future lies with domestic consumers, barely served by companies on the Shanghai bourse. Turkey is the opposite, needing painful economic reform – and tighter monetary policy – to reduce consumption and boost exports, which will hurt its domestically-exposed listed stocks. Turkey also faces political risk, which will surely slow reform. Neither looks to be fully priced in, so it could easily become much cheaper still. Irritating indeed.
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