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Banking on a seismic shift in global growth

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Asset allocators have refocused their attention on commercial property over the past six months, attracted by high yields and abundant liquidity.

In 2001 Goldman Sachs created the BRICs concept - identifying Brazil, Russia, India and China as fast growing economies. It was predicted they could rival the G7, in terms of share of global growth, by 2050.

As long-term equity investors, our LGPS clients have broad market exposure to global equity but we would contend that the long-term investment prognosis for the BRICs warrants the consideration of a standalone investment.

Our economists, led by Jim O’Neill, suggest that in the next years the BRICs will grow faster than other emerging markets and at a higher rate than the developed economies. We wanted to highlight the fundamental drivers.

Monetary flexibility

In the 1980s and 1990s the BRICs’ balance sheets were burdened by large deficits financed by heavy external borrowing. This served

as a lesson for many emerging market central banks. BRIC countries’ more conservative behaviour in the past decade was reflected in the cleanest balance sheets in their histories. This allowed them greater monetary flexibility than developed markets, better positioning them to weather the recent downturn by, for example, cutting interest rates.

Corporate balance sheets

It is similar in the corporate sector. Fundamentals are robust, as evidenced by their returns on equity, which are above their developed market peers. This improvement has come with deleveraging - debt/equity ratios of BRIC companies are lower than those in the developed market. BRIC corporations are posting strong free cash flow, a valuable attribute while credit markets remain tight.

Valuations

The rally in 2009 lifted BRIC equities back to long-term average valuations, when measured by price/earnings, price/book and dividend yield. Valuations are comparable to those for developed markets, despite the BRICs’ stronger growth profile. We expect this growth to be fuelled by:

  • Domestic consumer demand;
  • Robust infrastructure spending;
  • Technology-driven productivity improvements.

We are in the midst of a seismic shift of global growth from developed to developing markets. Investing in BRIC countries is key to boosting emerging markets’ equity exposure and is worth consideration for LGPS to take advantage.

  • Jim O’Neill will address these issues at a dedicated LGPS conference, 25 June

Column sponsored and supplied by Goldman Sachs Asset Management Ltd. Tim Bird is Head, local authority business, Goldman Sachs Asset Management

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