Indian investor Nirav Vora had 2.5 million rupees ($45,984) in the Indian stock market six years ago. Today that figure is down by 75 percent after investment losses and withdrawals. 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 says. “They have no faith in the markets.”
Disappointing economic growth and corporate profits have stocks in the BRIC nations—Brazil, Russia, India, and China—trailing global shares for a fourth year. While the Dow Jones industrial average is trading at an all-time high, the MSCI BRIC Index (MSCI) remains 37 percent below its 2007 peak. Emerging economies “are inherently and structurally more volatile,” says Jagannadham Thunuguntla, chief strategist at New Delhi-based SMC Global Securities. Investors should “realize that bumps on the way are not the exception, they are just the norm.”
Investors in the BRIC countries are losing their appetite for equities even as U.S. households pile back into them. Trading by Brazilian individual investors has dropped to the lowest level since 1999, exchange data show, as the benchmark Bovespa index has fallen 7 percent this year. Russian mutual funds posted 16 straight months of outflows, the most since at least 1996, according to the National League of Management Companies, a trade group in Moscow. “This is a somewhat steady march to the exit,” says Michael Shaoul, the chairman of New York-based Marketfield Asset Management, which is betting that shares in Brazil, India, and China will fall.
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. Local investors know that their own economies are not very strong, says John-Paul Smith, an emerging-market strategist at Deutsche Bank (DB) in London. “It’s difficult to find stocks you want to own.”
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 oil company Petroleo Brasileiro (PBR). Allegro first acquired stock in Petrobras, as the company is known, through a state asset sale in 2000 and now owns 128 common and six preferred shares. “I started selling my shares because I lost a lot of money,” Romano says. “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, vs. 7.4 percent for the Bovespa.
Dmitry Sukhov, who runs a Moscow-based firm that advises individuals on global markets, says he stopped buying Russian stocks about 18 months ago. “The Russian economy is becoming less market-friendly,” he says. “Investors were expecting liberalization of different economic sectors, and instead we’re seeing the opposite trend. There’s a sense of disappointment.”
The Shanghai Composite Index has tumbled 31 percent since the end of 2009, the most among the BRIC equity gauges. Former 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. 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. “I am still cautious on stocks,” Zhang says. “The outlook for economic growth is still murky.”
The bottom line: While U.S. stocks have reached record highs, the MSCI BRIC Index is 37 percent below its 2007 peak. Investors are fleeing.
