Don't give up on the world's BRICs
With the BRIC and other global emerging markets experiencing some of the worst share market declines in 2008/9, many people are asking whether the "BRIC story" remains valid. Some have already written BRIC off as yet another marketing gimmick (similar to the dotcom bubble) while others have suggested that the acronym should be changed to "BIC" (removing Russia) or even "BRAC" (to include Australia and Canada in place of India and China).
Don’t believe any of this - The BRIC story remains one of the key investment megatrends of the 21st Century. Here's why:
1. The BRICs are some of the best performing investment markets of the past five and 10 years
While the last 12 months have indeed been severe as investors have re-assessed the BRICs in the face of a global economic downturn and realigned their portfolios accordingly, investors in the BRIC story (often referred to as “emerging markets”) are still outperforming those in more developed markets (now being referred to as the “submerging markets”). See table below:
5 years | 10 years
| Brazil +14.64% | +15.28%
| Russia -3.37% | +21.14%
| India +4.62% | +9.35%
| China +7.62% | +3.67%
| USA -4.74% | -3.68%
| Australia -0.3% | +3.32%
2. The BRICs are maintaining economic growth by trading amongst themselves
One of the casualties of the global financial crisis, and the cause of why the 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 2007/8.
While economic growth in emerging countries has dropped only slightly, their securities and currency markets have fallen drastically. Presumably, many investors think that 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 (no more than 20% in the case of China and Brazil, and as low as 3% for Russia).
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 face some of the greatest challenges in reacting to the global economic downturn. Some of this can, and will, be counterbalanced by domestic fiscal and monetary stimulus and, with their US$580 billion stimulus package, the Chinese Government has virtually underwritten GDP growth in 2009.
But a new lifeline for developing countries is "intra-emerging market trade" which is becoming increasingly important, particularly amongst the BRIC countries which have emerged 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.
Another example, just announced this week, is the agreement between China Development Bank and the Russian state oil company, Rosneft, to exchange US$25 billion in loans for a daily supply of 300,000 barrels of oil for the next 20 years. The deal has been hailed by officials from both countries as the ideal way to address China's problems with energy supplies and Russia's lack of credit. The pipeline transporting oil from the vast oilfields in East Siberia will be the first from Russia to China and its load of 15 million tonnes each year will constitute around 4% of China's annual oil requirements. China-Russia trade grew by 18% in 2008 and was worth US$56.8 billion.
Similar trends are emerging throughout the developing world.
The point is that the global economy no longer grows and declines predominantly due to the US and Europe. According to the Financial Times, we can expect the world's GDP to increase by just 0.6% in 2009 with most of this growth coming from Brazil, Russia, India and China whose combined growth is forecast to be 4.7%, almost 8 times higher.
3. The BRIC economies have strong financial reserves and will continue to invest in infrastructure and domestic consumption
The four BRIC nations hold 41% 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 being subject to 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 grow – 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!
