The BRIC group — Brazil, Russia, India and China — for a number of years has functioned as a proxy for large developing markets with an attractive long-term return potential.
The BRIC group — Brazil, Russia, India and China — for a number of years has functioned as a proxy for large developing markets with an attractive long-term return potential.
The composition of this group is the interplay between the emerging economic giants of China and India, with more than three times the population of North America and Europe combined, and resource-driven economies such as Brazil and Russia that are considered prime beneficiaries of these resource- hungry giants as they develop their industry.
From 2003 through the beginning of 2008, the BRIC stock markets on balance soared as a combination of high growth rates and capital inflows resulted in returns that dwarfed those of the developed markets. In the initial stages of the global market contraction starting in October 2007, these markets, with the exception of an overextended China, held up relatively well.
Following the escalation of the global credit crisis and peak in commodities prices in June 2008, the BRIC and other emerging markets contracted viciously through late October.
Remarkably, however, the group — with the exception of India — bottomed in late October, more than four months before the developed markets did, and has recovered spectacularly in the course of this year.
It is time to assess the potential of these key economies and markets, which we will do in a reverse order as China and India collectively should determine the direction for Brazil and Russia.
China, which initially took a knock as its exports to the United States and Europe imploded in late 2008, was quick to announce a fiscal stimulus amounting to a massive 17% of gross domestic product.
The Chinese economy wobbled for a few months, but its focus of shifting gears to emphasize domestic consumption and investment is already bearing fruit, with growth expected to be a very respectable 7% this year. Challenges remain, but China's ability to cope with adversity is unparalleled. With more than $2 trillion in foreign-exchange reserves, strong government finances and well-capitalized companies, this shift to fewer exports should help underpin earnings growth in the long term
India is navigating the worst global economy since the 1930s in remarkably fine form. The country is an exporter of services that are relatively stable, has a low dependency on the export of manufactured goods, at least compared with East Asian countries such as China and Japan, and domestic demand has remained robust.
Of great long-term significance is the outcome of the recent general election, with a winning mandate for the Indian National Congress party potentially very positive for accelerating much-needed deregulation and infrastructure spending.
With a manageable current account deficit, India is reasonably well-positioned, though consumer price inflation and a large fiscal deficit could be problematic if not contained.
Russia is the only former communist country in the BRIC group. Transforming unproductive processes and capital were the key economic growth drivers after the collapse of communism in 1989. More recently, vast mineral resources, especially oil and natural gas, fueled growth and prosperity.
The collapse in commodities prices, combined with a fast- and-loose approach to foreign- shareholder rights and its assertiveness toward its neighbors, hit the Russian market hard.
With oil prices well off the recent lows, prospects are improving, but the economy nonetheless is expected to contract by 5% this year. The Russian market in the past few months has almost doubled after being down almost 80%.
The structural discount attached to Russian stocks due to sovereign risk may decline in time, but investors may remain wary after the many disappointments on this front in recent years.
Brazil, for many years an economic underachiever, finally brought its house in order this decade. Both the fiscal and current account deficits are modest despite a relatively mild recession. With interest rate cuts possible and a commodities cycle that is firming after the recent collapse, the outlook for 2010 is improving. While the market has more than doubled off its recent low, it remains well below the May 2008 peak. I believe a strategic and meaningful allocation to the BRICs and other emerging markets remains essential.
Martin Jansen is the senior portfolio manager at ING Investment Management of Hartford, Conn.
