17 October 2019
While Russia and Brazil are at a low point in the economic cycle, India remains attractive to foreign investors, provided tax laws are not changed to their detriment. Photo: Bloomberg
While Russia and Brazil are at a low point in the economic cycle, India remains attractive to foreign investors, provided tax laws are not changed to their detriment. Photo: Bloomberg

If BRICS is outdated, what next?

Emerging markets have posted a gain of 4.4 percent over the last 12 months and 9.6 percent so far this year.

By comparison, the MSCI global index has rallied 5.3 percent over the last 12 months, outperforming the emerging markets for that period.

However, the MSCI emerging markets index has surged three times as much as the MSCI global index so far this year, which indicates the emerging markets have fared better than developed markets.

That could be a trigger for switching from developed markets to emerging markets.

Brazil, one of the so-called BRIC emerging economies (the others are Russia, India and China), has enjoyed a 16.1 percent stock market rally this year.

But India’s stock market has dropped 2 percent this year while jumping 21.9 percent over the last 12 months.

Therefore, Jim O’Neill, who coined the term BRIC, said it is no longer suitable and that the major emerging markets should be divided into three categories.

First, in a category of its own, is China. It has already become the world’s second-largest economy despite slowing growth.

Second, the resource-rich exporters (including Brazil and Russia) that used to benefit from China’s rapid growth. They are now suffering from plunging prices of commodities like crude oil.

Third, countries like India, Indonesia and Mexico, which are focusing on structural reforms.

The BRIC notion will no longer be relevant if Brazil and Russia fail to return to a high-growth track in the next five years.

If so, there will be only the G2 — the United States and China — as the leading economies, followed by reform-driven countries like Indonesia and India.

The Indonesian and Indian markets performed very well last year. But they have been stagnant so far this year.

Europe and Japan have launched quantitate easing, and China and a few other emerging markets have tried their best to tackle economic issues.

Emerging markets have performed well so far this year, but India has experienced increasing capital outflows. Why?

Foreign investors may soon be liable to pay India’s minimum alternative tax (MAT), which India has required local companies to pay since the late 1980s.

If a local company’s income tax rate in India is less than 18.5 percent, then it has to pay the 20 percent MAT.

India’s government said in 2012 that foreign funds should be treated equally with local firms and could be liable to pay back taxes for the past seven years.

As a result, US$870 million of foreign capital fled from India in April alone.

And the market correction may last for a while.

However, foreign investors will demand full confirmation from the foreign fund companies, which have to explain to the investors who subscribe to their India funds whether they are suddenly required to pay additional tax.

And some investors may need to pay extra tax to make up for those investors who have exited and redeemed their investment.

Indian Prime Minister Narendra Modi must take the consequences of such a change in the tax rules into account.

He would not risk scaring away foreign funds after the economy has started to show an uptick.

And the Indian rupee might also suffer in the case of massive capital outflows.

Therefore, investors should take the opportunity to accumulate some stocks if they believe the Indian government won’t levy the tax on foreign investors.

The market has had high expectations of Indonesian President Joko Widodo.

But his new government has very little influence on regional elections.

investors were disappointed at the recent Indonesian economic and company earnings data, dragging the market down from a high of 5523.29 points in the last few days.

This article appeared in the Hong Kong Economic Journal on May 7.

Translation by Julie Zhu

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.