Current valuations of the two most heavily-weighted BRIC nations favour China over Brazil, says Patrick Gautier, portfolio manager of the HSBC BRIC Equity Fund. which returned 59% year-over-year in 2009.
"Short term, there
is a discrepancy between the two markets," said Mr. Gautier during a recent phone interview. "We find
the Brazilian market too expensive. In 2009, it grew by 120% in U.S.
dollar terms, compared to the Chinese market that grew only 70%."
39% of Mr. Gautier's current fund holdings are in China compared with a 33% weighting in Brazil. By comparison, the benchmark MSCI BRIC index is weighted 37% to China and 35% to Brazil.
He is also slightly overweight Russia, with a 14% stake versus 13% for the benchmark, and slightly underweight India, with a stake of 14% versus 15%.
The Russian market, which was trading at 8x earnings at the end of 2009 versus 14x for the other three BRIC nations, is even cheaper than it normally is on a relative basis, Mr. Gautier said.
"The Russian market is riskier
than other markets, but because it is more volatile, opportunities may
occur more often over the short term," he said.
"Buying and selling Russian
equities may allow for investors to get more alpha over the long term."