Brazil Fund Year-to-Date Return -14%
India 49%·Russia 30.72% Performance
Inflation and Government Populism Policies Increase Political and Fiscal Risks
[Asia Economy Reporter Minji Lee] The fortunes of funds investing in BRICS countries (Brazil, Russia, India, China), representative emerging market investment destinations, are sharply divided. Amid concerns of stagflation and government populist policies, only Brazilian funds are retreating.
According to financial information provider FnGuide on the 23rd, 10 Brazilian equity funds launched domestically recorded a return of -14.51% since the beginning of the year. They showed a -17% return over six months and fell by 7% in the past month alone. This underperforms the average returns of overseas equity funds, which are 10% and 16%, respectively, making Brazilian funds the lowest-performing among overseas equity funds. During the same period, returns from other BRICS countries were 49% for India, 30.72% for Russia, and around 4% for China. Although emerging markets generally experience increased financial market volatility due to foreign capital outflows when advanced countries begin monetary policy shifts, Brazilian funds appear isolated compared to other BRICS funds.
The poor performance of Brazilian funds is due not only to external factors but also to internal political and fiscal risks. The Brazilian benchmark index, the Bovespa Index, closed at 12,122.37 on the 22nd, down more than 16% over the past three months. With Brazil recording the world's second-highest number of COVID-19 cases and global supply chain disruptions intensifying stagflation (simultaneous economic recession and inflation) concerns, stock market uncertainty is growing. To curb the rapid inflation rate, the benchmark interest rate exceeds the neutral rate, and this year's economic growth forecast has been revised down from 5.3% to 5.1%, with next year's growth forecast lowered from 2.5% to 2.1%.
Moreover, market anxiety has increased following President Jair Bolsonaro's announcement of populist policies such as subsidy support and fuel subsidy payments. Seungjin Park, a researcher at Hana Financial Investment, explained, "Along with the sharp rise in prices of major export items like ores and soybeans, production activities that had been strong are weakening from the third quarter, and consumption indicators are not improving. Concerns over increased fiscal spending can be interpreted as factors contributing to Brazil's debt burden and credit rating uncertainty."
Conversely, India, Russia, and China showed differentiated trends amid contrasting government reform intentions and raw material benefits. Indian funds benefited from market-friendly government policies and accommodative monetary policy, which acted as catalysts for stock price increases. Meanwhile, concerns over the bankruptcy of China's Evergrande Group and regulatory risks from China positively affected the stock market, benefiting from a 'anti-China' sentiment. Over the past six months, Indian funds also posted returns in the 26% range.
Russian funds, true to the resource-rich nation, greatly benefited from rising natural gas and oil prices. Although recent declines in oil prices have reduced fund performance due to the correlation between oil prices and the index, the stock market volatility is expected to gradually stabilize as economic conditions improve with rising oil prices. Chinese funds, which had consistently maintained negative returns due to large-scale adverse factors such as antitrust issues, the Evergrande crisis, and power shortages, have turned positive and are showing an upward trend. Namjoong Moon, a researcher at Daishin Securities, said, "Although difficulties persist, these are merely steps toward stabilizing the Chinese Communist Party system. Preventing economic slowdown for regime stability is indispensable, and seasonal rises are expected ahead of policy expectations and political events."
In the securities industry, it is said that for Brazilian fund performance to show an upward trend, resolving fiscal uncertainties by year-end and improving the external environment are essential. Currently, the 12-month forward price-to-earnings ratio (PER) of the Brazilian stock market is at 9, below the average of 12, placing it at a historical low and making its valuation attractive. Jonghyun Jo, a researcher at Shinhan Financial Investment, explained, "If logistics issues become visibly resolved early next year and China's policy shift to stimulate the economy improves iron ore exports, the low price merit of the Bovespa Index could become more prominent."
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