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CFA Institute Survey Reports Investors in ‘BRIC’ Economies See Domestic Political Risk as Primary Investment Concern over Next Three Years

 

Respondents also indicate that resident companies’ corporate governance and financial reporting practices still need improvement to match non-resident companies.

 

( View 2005 survey results)

( View 2006 country-specific survey results: Brazil, Russia, India, China) (PDF)

( View China Corporate Governance Survey Results)

 

 

Hong Kong, April 4, 2007 – CFA Institute today released the results (PDF) of its annual survey of investors in BRIC countries – Brazil, Russia, India, and China – and reported that these investors are slightly more optimistic about their country’s investment market than in 2005, even though domestic politic risk ranked highest on the scale of investment concerns.

 

More than 1,700 CFA Institute members and candidates in the Chartered Financial Analyst® (CFA®) program participated in this investor attitude survey of the BRIC countries, giving a unique overview of market professionals’ concerns in these emerging markets.  This is the second annual survey of investor views on the investment climate, corporate governance, and financial reporting of their countries.  A separate, concurrent survey on China corporate governance was also recently released ( view).

 

By a wide margin (61 percent in Brazil, 70 percent in Russia, 70 percent in India, and 61 percent in China), respondents also indicated that securities of resident issuers would offer the most upside potential over the next three years.  However, the perceptions are much different when you compare this with the results from the 2005 survey:  60 percent in Brazil, 66 percent in Russia, 74 percent in India, and 32 percent in China.  In 2006, Indian and Chinese respondents believed that derivatives had the next highest potential, while those from Brazil leaned toward government debt instruments.

 

“This survey acts as an interesting barometer on how financial market professionals see issues in their market place,” said Jan Squires, CFA, managing director of CFA Institute Asia Pacific operations.  “While it is not entirely surprising that confidence in both India and China is growing, it is the huge growth in optimism since the 2005 survey that should be noted for China. Clearly the continued accessibility of local markets, the adoption of free market principles and the build up to events like the 2008 Olympics are having a huge internal impact on confidence.”

 

CFA Institute conducted the survey using an online questionnaire.  The overall response rate was 22 percent.  In all, 1,771 CFA Institute members and candidates from Brazil, Russia, India, and China participated in the survey during October-November 2006 (128 in Brazil, 217 in Russia, 1,232 in India, and 194 in China).

 

 Indian and Chinese Investor Optimism Remains Strong:

 

• In 2005, Indian investors were the most optimistic about their market: 55 percent were “highly optimistic” and 39 percent were “somewhat optimistic.” These sentiments continued throughout 2006 at 57 percent and 39 percent, respectively. 
• However, the perceptions of investors in China were markedly different since 2005.  In 2005, 16 percent were “highly optimistic” and 53 percent were “somewhat optimistic,” but in 2006, 36 percent were “highly optimistic” and 52 percent were “somewhat optimistic.”
• Over the past year, 82 percent of respondents in India indicated that their attitude has become somewhat or more optimistic towards the investment market, compared to 78 percent in China, 51 percent in Russia, and 47 percent in Brazil.

 

Market Sectors with the Most Upside Potential

 

Respondents were asked to select the three market sectors that would offer the most upside potential over the next three years. Not surprisingly, there was little difference among the top three top categories from 2005 to 2006.  Indian investors felt more strongly about the “communications, technology and telecoms” industry in 2006 and in Russia, the “banking, finance, and insurance” category rose from third place to first.

 

 

Country	#1 in 2006	#1 in 2005	#2 in 2006	#2 in 2005	#3 in 2006	#3 in 2005
Brazil	Real estate (52%)	Oil, gas, & utilities (50%)	Banking, finance, & insurance (48%)	Banking, finance, & insurance (49%)	Construction (39%)	Consumer goods, services & retailing (40%)
Russia	Banking, finance, & insurance (56%)	Consumer goods & services, retailing (58%)	Consumer goods & services, retailing (45%)	Oil & gas, energy, utilities (53%)	Oil & gas, energy, utilities (40%)	Banking, finance, & insurance (49%)
India	Banking, finance, & insurance (57%)	Banking, finance, & insurance (55%)	Communications, technology, & telecoms (41%)	Construction (36%)	Construction (38%)	Communications, technology & telecoms (35%)
China	Banking, finance, & insurance (71%)	Banking, finance, & insurance (61%)	Consumer goods & services, retailing (44%)	Consumer goods & services, retailing (37%)	Real estate (27%)	Oil & gas, energy, utilities (33%)

 

Corporate Governance, Financial Reporting and Disclosure, and Ethics

 

Generally, investors in Brazil, India, and Russia believe that non-resident companies provide better quality corporate governance, financial reporting, and disclosure when compared to resident companies.  In 2005, only Indian respondents considered corporate governance standards among resident listed companies to be “excellent” (four percent).  This number decreased slightly to three percent in 2006 and two percent (compared to none in 2005) of respondents from Brazil agreed.

 

Respondents do believe that the quality of financial reporting and disclosure by resident companies is improving, albeit slightly.  Only 15 percent (10 percent in 2005) of Russian investors believe that the quality of financial reporting and disclosure by resident companies was “good,” compared to 50 percent of investors from Brazil (47 percent in 2005) and 43 percent of investors from India (also 43 percent in 2005).  In contrast, more than 50 percent of investors from Brazil, Russia, and India perceived these practices by non-resident companies to be “good.”

 

Russian investors’ perceptions retained a similar pattern when asked to rate the ethical climate among corporations and other securities issuers.  Investors in Brazil (46 percent in 2006, 46 percent in 2005) and India (54 percent in 2006, 56 percent in 2005) believe that corporations are “somewhat ethical,” while Russian investors’ perceptions fell to 16 percent (11 percent in 2005). 

 

When asked about the ethical climate within the investment profession, respondents from Brazil (56 percent in 2006, 51 percent in 2005) and India (53 percent in 2006, 50 percent in 2005) chose “somewhat ethical,” with Russian respondents trailing at 40 percent (35 percent in 2005).

 

A separate survey (view) of CFA charterholders and CFA Institute members in Hong Kong and China who have investments or interests in Chinese companies showed that while the Chinese government has done much to put in place a sound corporate government framework, observable changes are still not evident in financial disclosures and transparency. This is viewed by the survey respondents as very important for decision-making.  

 

CFA Institute
CFA Institute is the global membership association that administers the Chartered Financial Analyst® (CFA®) and Certificate in Investment Performance Measurement (CIPM) curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has nearly 90,000 members, who include the world’s 77,000 CFA charterholders, in 131 countries and territories, as well as 134 affiliated professional societies in 55 countries and territories. In 2007, CFA Institute celebrates the 60th anniversary of “the founding of a profession.” CFA Institute has offices in Charlottesville, Va., London, Hong Kong, and New York. More information may be found at www.cfainstitute.org. (Bloomberg users can find CFA Institute at 497458Z).