Emerging Markets: Embrace your inner BRIC

With the Brazil, Russia, India, China (BRIC) and other global emerging markets experiencing some of the worst share market declines in 2008, many people are asking whether the BRIC story remains valid.

Some have already written BRIC off as yet another marketing gimmick (similar to the dot-com bubble), while others have suggested the acronym should be changed to BIC (removing Russia) or even BRAC (to include Australia and Canada in place of India and China). On the contrary, the BRIC story remains one of the key investment mega trends of the 21st Century.

1. The BRICs are some of the best performing investment markets of the past five and 10 years

While the past 12 months have indeed been severe as investors have reassessed the BRICs in the face of a global economic downturn — and realigned their portfolios accordingly — the five and 10-year non-annualised returns from each BRIC share market index (in US dollars) compare favourably to more developed markets (see Table 1).

Don’t be deceived by the returns over the past 12 months, long-term investments in the BRIC story are still outperforming those in more developed markets.

2. The BRIC economies are maintaining economic growth by trading with each other

One of the casualties of the global financial crisis, and the reason BRIC and other global emerging markets have been so badly savaged in recent months, is the failure of the ‘decoupling’ theory, which was the subject of much debate, speculation and

optimism in 2007-08.

While economic growth in emerging countries has dropped only slightly, their securities and currency markets have fallen dramatically.

Presumably, many investors think the US economic downturn will lead to a dramatic drop in US orders of emerging market products, which will in turn cause those economies to experience an economic downturn themselves.

But this ignores the fact that BRIC exports to the US at their peak in 2007 were a relatively small part of total BRIC exports (see Table 2).

There is no doubt that China, in particular, has experienced a severe contraction in US and European orders and, being an export-led economy, it will suffer the most of all the BRICs from the global economic downturn. Some of this can and will be counterbalanced by domestic fiscal and monetary stimulus and, with its US$580 billion stimulus package, the Chinese Government has virtually underwritten gross domestic product growth in 2009.

But a new lifeline for developing countries is ‘intra-emerging market trade’, which is becoming increasingly important, particularly among the BRIC countries with their emergence as a new ‘trading bloc’.

A good example of this is the growth in exports of iron ore from Brazil (and coal and oil from other emerging markets) to China to fuel the latter’s massive infrastructure development and growing consumer demand.

Trade between Latin America and China has increased by 13 times since 1995, from US$8.4 billion to US$100 billion. Similar trends are emerging throughout the developing world.

The point is that the global economy no longer grows and declines predominantly because of the US and Europe.

According to Dun & Bradstreet, while world economic growth is expected to hold up at 1 per cent in 2009, the economies of five of the G7 member nations — US, UK, Germany, Italy and Japan — are expected to contract.

When investment markets focus on fundamentals again, and accept that much of 2009’s economic growth will come from the four BRIC countries, the BRICs will lead the global share market recovery.

3. The BRIC economies have strong financial reserves and will continue to invest in infrastructure and domestic consumption

The four BRIC nations hold 41 per cent of total global foreign exchange reserves: US$1,528 billion in China; US$464 billion in Russia; US$266 billion in India; and US$179 billion in Brazil.

These have allowed each government to respond to the global financial crisis by announcing fiscal stimulus packages, bringing forward infrastructure spending on housing, education, public health, transportation and energy projects, and handing out social benefits to encourage consumers to spend more.

The combined BRIC investment in infrastructure of over US$22 trillion by 2020 was planned well before the 2008 global economic downturn and, far from looking to cancel or defer these commitments to building much-needed roads, rail, ports and power generation, the BRIC countries have actually brought forward spending plans to stimulate economic growth.

4. The BRICs are hungry, and determined to grow

It is easy to forget that only 30 years ago all four BRIC countries were virtually bankrupt. Their vast, hungry and diverse populations were experiencing the pain of poverty and hardship, inept and/or weak governments, stagnating economies and the humility of enduring regular lectures from the West about how to run their countries.

How times have changed. To quote Brazilian President Luiz Inacio Lula da Silva during the G20 talks at the end of 2008: “Important banks — very important banks — that spent their lives giving advice about Brazil and what we should or shouldn’t do are now broke.

“Brazil is more prepared than any country in the world to deal with the new global economic landscape, and has been preparing for some time to become a solid economy.”

Each of the BRIC countries needs to grow, and will continue to, in order to satisfy the increasing ambition of its huge population to improve standards of living, increase personal wealth and live a better life. This century will see the four BRIC countries become four of the six largest economies in the world — don’t give up on them yet!

David Thomas is co-founder and director of the BRIC+ Program.