Salient to Investors:

John-Paul Smith at Deutsche Bank said stocks in the major developing markets will again lag global equities in 2013 – China has focused on increasing the pool of buyers for Chinese assets, rather than boosting the role of free markets and privately run companies in the broader economy. Smith prefers cash to BRIC shares, which he sees as a contest between the un-investible and the overvalued.

The IMF expects growth in BRICs to average 4.5 percent in 2012 versus 8.1 percent in 2010 and 3.3 percent for the global economy.

Mark Mobius at Templeton Emerging Markets said we are only in the middle of the revolution from socialism to market economies, with a long way to go. Mobius is selling Indian mining stocks because of government restrictions.

Allan Conway at Schroder Investment Mgmt said the fact that we talk about how much further there is to go, shows the opportunity.

The MSCI BRIC index is at 10 times earnings, 30 percent less than the MSCI’s All-Country P/E. The MSCI index of Chinese financial stocks trades at 8 times earnings, 36 percent below its 5-yr average and versus MSCI’s index of consumer staples at 28 times earnings, a 34 premium to its historical mean. The Micex index trades at 5.9 times earnings, the lowest level of 45 emerging and developed markets.

Ruchir Sharma at Morgan Stanley Investment Mgmt said governments reform only when they have their back to the wall – we’re moving in the right direction in some countries, but the task is enormous.

The McKinsey Global Institute said Brazil may face an equity gap of more than $1 trillion this decade as companies’ financing needs outstrip investor demand for shares. Many investors in BRIC companies prefer to buy shares on overseas exchanges. The drop in stock trading makes it harder for governments to revive growth.

Jeff Urbina at William Blair said:

  • Chinese companies need funding sources outside the banking system.
  • Good publicly traded markets are necessary for developin long-term.
  • Investors are more concerned about a lack of corporate governance in Russia than how they access local markets.
  • The real big issue in develping markets, particularly Russia, is the lack of corporate governance – all the value in the world is not going to get to the shareholders.

Jim O’Neill at Goldman Sachs Asset Mgmt said India is the most promising BRIC in terms of long-term stock gains. O’Neill is bullish on Chinese equities as China’s changes are very exciting and very positive. .

Soren Beck-Petersen at HSBC Global Asset Mgmt said India is tackling the issues head on to stimulate growth and restore investor confidence.

The 8 largest companies by market cap in the Shanghai Composite are state-controlled. The World bank says over 25 percent of China’s state-run enterprises are unprofitable, while productivity growth has trailed non-state firms by 66 percent over the past 3 decades.

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