Global BRIC stock funds attracted record inflows in 2009; do you think this trend will continue into 2010? In other words, will BRIC stock markets continue to outperform global markets? Why? If not, which emerging markets do you think will outperform?
Yes, we believe that BRIC markets will continue to do well over the long run but over the short run, we must remember that these markets are volatile. So, if an investor is not prepared to hold his investments for at least four or five years, he may not get to enjoy good performance on his investments.

Which country (ies) do you like the best among BRIC in terms of stock investment in 2010? Why?
Our largest holdings are in Brazil, China and India but we are continuing to hold and purchase Russian stocks due to their attractive valuations and long-term potential. All four markets present opportunities at the moment and it is difficult to pick any one over the others.

Which sectors do you favor the best in BRIC? Why? Many are looking to the consumer-related stocks in BRIC. In your opinion, which kinds of companies are most likely to benefit from consumption stories in BRIC?
We favor two sectors: commodities and consumers. Companies that are strong in production of commodities such as oil, iron ore, nickel, platinum and other such products are favored. In the consumer area, we are interested consumer banking, retail and consumer disposable product companies.

How long will the re-stocking for commodities situation last? Under this shaky global macro-environment, do you expect the commodity prices to drop next year? Is it good to shift the asset allocation from relatively commodities-dependent market such as Brazil and Russia, to India and China?
We expect commodity prices to continue to trend upwards, partly because of weakness in the U.S. dollar, and also because we expect the global demand for commodities to outgrow supply over the long term. However, speculation in the derivatives markets is likely to exacerbate volatility in the sector, and we recognize that the upward trend in commodities is unlikely to be smooth.

Given faster economic recovery and increasing inflation pressure, it seems that BRIC economies may become the first to raise interest rates. How will this kind of action affect the stock markets?
A rise in interest rates will, of course, have a negative impact on markets if inflation is not rising at the same time. If inflation rises faster than interest rates then the impact may not be as negative. We must remember, however, that interest rates are only one of the factors that impact markets and many other factors come into play.

Hot money and potential asset bubbles are among major concerns in BRIC countries. What's your opinion on those issues? What are the major risks for BRIC stock markets in 2010?
There is "hot" money all over the world with hedge funds and derivatives playing an important role. Current the total value of derivatives is over US$600 trillion, 10 times more than the total economic output of the world. These derivatives can help develop asset bubbles as we have seen in the real estate market in the U.S. I would say that this is the biggest threat to markets worldwide including BRIC stocks.

What are the most appealing investment themes of Brazil equity in 2010? Why?
Brazil is the largest investable market in Latin America. It is not only a strong commodity producer and exporter but also a country with a large and growing consumer base. Brazil's economy is diversified and largely domestically driven, as exports account for less than a quarter of GDP. This domestic strength is one of the reasons for the Brazilian economy's relatively faster recovery compared to most other global economies. Its big consumer market creates opportunities for a wide range of firms, including financial services providers, health care firms, cosmetics companies and beverage manufacturers.

What is your outlook for Russia?
In general, our long-term outlook for Russia is positive. The country has the world's third largest foreign exchange reserves at more than US$400 billion. Moreover, Russia owns large proportion of the world's natural resources and many of the country's commodity companies are among the world's low-cost producers. Last but not least, it is interesting to note that based on current valuations, the Russian market is among the cheapest in the emerging market universe.

What is your outlook for the Indian market for 2010?
India's macroeconomic fundamentals have significantly improved. The government has done a good job in managing the economy through the recent crisis and unlike companies in the U.S. and Europe; most Indian companies have healthy balance sheets and strong cash flows. The Indian stock market was a good performer in 2009 and we expect it to continue to outpace other emerging markets this year.

To what extent will the China equity markets be affected by the following events in the coming year?

(i) Weak or slightly improvement export
Export weakness will adversely impact China's manufacturing sector. Any improvement will be beneficial for the economy and stock markets.

(ii) Exit strategy taken by PBOC (People's Bank of China)
If the withdrawal of liquidity is done in a systematic manner, then it should not have any serious impact on the stock market. It is highly unlikely that PBOC will do anything to destabilize the stock markets.

(iii) Potential asset inflation bubbles threat
Bubbles, if left unchecked, will have serious long-term consequences for stock markets. The PBOC has so far shown great diligence to keep all such asset inflation bubbles in check. Any actions taken might have an adverse impact in the short-term but for long-term investors, it is positive.

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FTIF - Templeton BRIC Fund.

Posted: 1 March 2010