Co-founder & Director, BRIC+ Program
February 24, 2009
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With the 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-off BRIC 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).
Oh ye of little faith! The BRIC story remains one of the key investment megatrends of the 21st Century.
The BRICs were 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, the five- and 10-year non-annualized returns from each BRIC share market index (in US$) compare favorably to more developed markets.
Figure 1 – Share market index returns to 14 January 2009
|
Non-annualized total return |
Non-annualized total return |
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 |
- 0.31 |
+3.32 |
Source: MSCI/Barra
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.
The BRICs are maintaining economic growth by trading amongst themselves
One of the casualties of the global financial crisis, and the reason why the BRIC and other global emerging markets have been so badly savaged in recent months, is the failure of "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.
Figure 2: Exports by the BRIC countries to the US (2007)
|
Exports to the US as % of total exports |
Total Exports as a percentage of GDP |
Brazil |
20 |
13 |
Russia |
3 |
25 |
India |
15 |
33 |
China |
19 |
70 |
Source: BRIC+ Digest Winter 2008
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 their $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 among 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 $8.4 billion to $100 billion. Similar trends are emerging throughout the developing world.
The global economy no longer grows and declines predominantly due to the US and Europe. According to Dun & Bradstreet, while world economic growth is expected to hold up at 1% in 2009, the economies of five of the G7 member nations - US, UK, Germany, Italy and Japan - are each expected to contract. When investment markets again focus on fundamentals 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.
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