Resurgent growth is reviving one of the past decade’s hottest trades.

Emerging-market investors are again piling into the so-called BRIC nations — Brazil, Russia, India and China — pushing monthly inflows and stock prices to nearly two-year highs. The bet is that a pickup in the global economy will fuel demand for the countries’ commodity exports, drive an expansion of middle-class consumption and help them shore up fiscal accounts.

Wooed by India’s efforts to streamline regulations, Brazil’s economic rebound, stabilizing prices for Russian oil exports and China’s stronger currency, traders are warming to the countries’ higher yields and better outlook for equities. It’s an abrupt reversal after they were scorched by a 40 percent drop in the biggest BRIC exchange-traded fund from the end of 2012 through early 2016 as Brazil lost its investment grade, Chinese growth slowed from a meteoric pace, Russia’s oil revenue plummeted and India’s current account deficit swelled.

“Improving fundamentals, attractive valuations, and high yields in a yield-starved world make emerging markets once again attractive, including some of the BRICs,” Jens Nystedt, a New York-based money manager at Morgan Stanley Investment Management overseeing $417 billion in assets, wrote in an email.

Non-resident portfolio flows into BRIC nations rose to $166.5 billion last month, up from $28.3 billion in outflows 12 months prior, according to data compiled by the Institute of International Finance and EPFR Global. Chinese equities saw their biggest quarterly inflows in two years, while traders piled into Indian bonds at the highest level in almost three years, Bloomberg data show.

Mark Mobius, executive chairman of Templeton Emerging Markets Group, favors Brazil, China and India, adding that Russia will also benefit from a growth rebound. Brazilian assets will benefit as Latin America’s largest economy bounces back from two years of contractions, while Chinese investment will pick up as its foreign reserves recover from a six-year low in January, according to Steve Hooker, who helps oversee $12 billion of assets as an emerging-market money manager at Newfleet Asset Management.

Fastest Growth

Coined in 2001 by former Goldman Sachs economist Jim O’Neill, “BRICs” became a ubiquitous shorthand for the fastest-growing emerging economies (other investors later capitalized the S and added South Africa to the mix).

In the decade ending Dec. 30, 2012, developing-nation equities had annual returns of 17 percent, twice those of developed nations. That changed in the taper tantrum years amid fears that the Fragile Five, which included Brazil and India, would struggle to meet high external funding needs. Responding to changing sentiment, Goldman Sachs Group Inc. shut its BRIC fund in October 2015 after losing 88 percent of its assets since a 2010 peak.


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Indian Summer

As India’s monetary policy committee begins its two-day meeting, the inflation-targeting central bank may be using flawed price measures as the basis for its swing to neutral policy.

All 52 economists in a survey predict the Reserve Bank of India will leave the repurchase rate unchanged at 6.25 percent on Thursday, as price pressures appear to be picking up. Governor Urjit Patel is concerned about core inflation — stripping out volatile food and fuel costs — which he says is worryingly sticky.

But what if the core gauge and the benchmark consumer-price index are off the mark? Patel could be missing a window to lower borrowing costs to spur investment proposals that are near a decade low. Such concerns revolve around three question marks over price data.

Core Concerns

The RBI’s measure of core CPI shows stickiness around 4.8 percent year-on-year since September. This feeds into overall CPI, which accelerated in February for the first time in seven months to 3.65 percent, nearing the 4 percent midpoint of the RBI’s target range. Bloomberg Intelligence’s economist Abhishek Gupta says that’s because the RBI hasn’t fully stripped out fuel costs from its transport basket; once done, core CPI is at 4.2 percent.

“A falling core-CPI inflation suggests that the pricing power at the retail level is sliding due to inadequate demand,” Gupta said. “This should signal the central bank to cut the policy rate in order to stimulate demand so that the economy can operate closer to potential.”

Consumption Patterns

Another argument pertains to the weights the RBI assigns various consumption patterns in its CPI basket. These are based on the government’s surveys on consumer expenditures in 2011-2012, which show that the average Indian spends about 46 percent of monthly income on food, the main driver of local prices.

More contemporary data published in January pegs private consumption expenditure on food at about 30 percent. Moreover, economists such as Surjit Bhalla, senior India analyst at Observatory Group, have argued that the CPI data ignores spending on financial services, and could be overestimating price pressures by roughly a full percentage point. He declined to comment when reached by email on Friday, citing obligations with Observatory.

Missing Inputs

Economists such as Soumya Kanti Ghosh at State Bank of India say the nation’s statisticians aren’t accounting for the rising e-commerce market, which offers consumers big discounts. Instead, they seek inputs from traditional suppliers, which typically sell at higher prices.

The gap was flagged by the RBI’s external advisory group in 2015, which has since been replaced by the monetary policy panel that votes on rates, and the government was last year said to be planning to include online retailers in its dataset. In a report published last month, Ghosh predicted headline CPI was below 4 percent in March, lower than his previous estimate of about 4.4 percent and the RBI’s 5 percent target.

TCA Anant, the government’s top statistician, said CPI represents the average Indian consumer, and so certain types of consumption — such as spending on luxury goods — may not be included in the index. The next consumer expenditure survey will ask people about online purchases, though that’s probably quite small, he said in an interview in New Delhi on Monday.

Apart from these questions about the price data, inflation could also swing as the outlook on India’s crucial monsoon rainfall remains uncertain and clarity is still awaited on the roll out of higher housing allowances for government employees and a nationwide sales tax.


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