Of all the BRIC countries, Russia remains the only attractive investment prospect, argues James Smith, manager of the Ignis International Emerging Markets Select Value Fund.

Smith’s fund is currently underweight all the BRIC economies save Russia and it is the firm’s view that China is still not good value even if it is less overbought. His preference is instead for Eastern Europe countries such as Poland and the Czech Republic, Israel and Egypt.

Assessing Brazil first, Smith says he has recently upped the fund's exposure to a small underweight in recognition of the country’s long-term potential for growth. However, he has moved cautiously due to his belief that the market had got ahead of itself and equity prices were unjustifiably high.

Russia, meanwhile, remains an attractive prospect despite no longer being the “screaming buy” it was last year on valuation grounds. “Nonetheless, it is possible to buy stocks in Russia trading on P/Es of around 7-8 times earnings; still very cheap, although they have risen recently due to higher energy prices. Russia might be a candidate for profit taking in the coming weeks and months although we will see how the market performs,” says Smith. 

India

Taking a closer look at India, Smith has little exposure on the basis that the country was “very overblown” at the end of last year; multiples were too expensive driven by an overly bullish market, he explains. The subsequent sell-off has not made valuations attractive, and moreover India faces significant inflationary pressures, despite monetary tightening having commenced.

“The big question is: can India tighten without hitting its economic growth? The jury is still out on that question, so while we will maintain our low exposure (against a benchmark weight of 7.0 per cent) for the time being, we may look to add some positions - if the market sufficiently de-rates over the coming months,” says Smith.

Turning back to China, Smith points out that the market often confuses GDP growth with stock market performance, with sentiment towards China being a classic case of this. Instead, he argues that investors should be looking for a “sweet spot” when the prospects for corporate earnings growth look good while valuations are still cheap. His view is that Chinese firms are largely overvalued despite them being more attractive than previously due to a recent market fall.

“While more attractive than India, China is not yet sufficiently compelling on any measure to warrant an overweight position and we are currently 2.5 per cent underweight. That has come down a long way from our 10 per cent underweight last year but, while we believe China will have a soft rather than hard landing, for now there are better opportunities elsewhere,” Smith says.

Looking outside the BRIC countries, Smith has established a 4 per cent overweight to Israel on the basis that its market has become very cheap.

“Israel has been neglected by global funds, in large part because of the move from  ‘emerging’ to ‘developed’ market status, and the sentiment in the Middle East has not helped its cause. It [the market] is attractively priced, the fundamentals are reasonable, and it has been overlooked by investors, all things that appeal to us,” he says.

Smith is higher conviction on Eastern Europe, where his fund has a big overweight. As he notes, last year countries like Poland, Hungary and the Czech Republic were shunned by investors, mainly due to the gloom over the sovereign debt crisis and the fiscal problems facing certain countries in the region. While Ignis took account of these risks, it was the firm’s belief that with P/E ratios were between 9 and 11 times 2011 earnings valuations “more than compensated for the risk.”

“Poland and the Czech Republic in particular have good earnings growth and we are around 5.2 per cent and 5.3 per cent overweight respectively in these countries,” says Smith.

He also favours Argentina and Eygpt, the latter’s market having fallen due to the political uprising from an already undervalued base. The firm now estimates the Egyptian market is undervalued by 20-25 per cent and in recent times Smith has built up a 4.3 per cent overweight position.

“Although it is hard to gauge the impact on economic growth of the crisis - both corporate earnings and GDP will be revised downwards - recent share price activity suggests that the market has already begun to discount this, and we do not believe the end result will be as bad as the consensus fears,” says Smith.

Finally, at 4.9 per cent over the benchmark, Argentina is one of Smith’s fund’s largest overweights.

“Argentina has two things going for it: extremely strong GDP growth expected to be more than 6 per cent this year and a market trading on a P/E multiple of 9. It is a market that has done very well for us and, while we have seen a recent period of consolidation, we will continue to hold it due to strong underlying valuation support,” he concludes.