BRIC markets Building financial freedom. Vincent Rooney of Rooney Gallagher Private Equity Partners

Dec. 13, 2010 - PRLog -- Investment Bank Goldman Sachs coined the term BRICs, which stands for the collective economies of Brazil, Russia, India and China. After its original use five years ago, the term has caught on. Morgan Stanley launched an MSCI BRIC Equity Index last year. Global investment pioneer Templeton Investments even launched a BRIC Fund. The economic performance of BRIC economies has matched the hype, exceeding even Goldman Sach's original expectations. Goldman Sachs now expects that the BRICs could become larger than the G6 -- the U.S., Japan, Germany, Australia, the U.K., and France -- as soon as 2035.

The development of the BRICs during the last five years has been impressive. Those countries have accounted for 30% of global growth since 2000. Their share of GDP in the global economy rose from 7.8% to 11% over the same period. Nor has the torrid growth pace of the BRICs slackened. Goldman Sachs predicts BRICs will grow 8.5% in both 2007 and 2008. Compare that projection with a forecast of 2.5% for the developed world, and 4.2% for the global economy as a whole, and you can see why BRICs are getting so much press. The balance sheets of the BRICs also are much improved. China's foreign reserves stand at over $1 trillion. Russia's turnaround is even more impressive. After recovering from economic collapse in 1998, its foreign currency reserves stand at $280 billion -- greater than that of the entire Eurozone.

Making Money BRIC by BRIC

Investors in BRIC stock markets have made big money over the past five years. Brazil has shot up 165%, India 229%, China 348% and Russia 713%. Yet surprisingly, valuations remain attractive. Brazil is trading at 9x 2007 earnings, China and Russia at 11-12x, and India at 14x. Although India may appear relatively expensive, Indian companies earnings are up 25% this year and 15% in 2007.

What has been the key to big profits in BRIC stock markets? As Julian Mayo of Charlemagne Capital (and a former presenter at the London Junto) has pointed out, for the first time in their history, BRIC companies are focused on maximizing their profits. That was not the case until relatively recently. And a flurry of privatizations and IPOs mean that the importance of BRICs in global stock markets will only continue to grow. Five years ago, few analysts would have guessed that China would be the home of the world's biggest IPO.

What are the prospects for BRICs over the next five years? Thanks to a one-off revaluation of its commodities-based stocks, it will be tough for Russia to repeat the big gains of the last five years. India's tech giants are also fully valued -- though India's burgeoning financial sector looks poised for big gains. The Chinese market has underperformed for so long that its upward move that began a year ago may be the start of a long-term rally. The dark horse among the BRICs is Brazil. Interest rates are still at 13.25% -- having dropped from above 19.75%. But once inflationary expectations are squeezed out of the system, equities may be set for a one-time revaluation that could leave the other BRICs in the dust.

The BRIC Rollercoaster

As the May-June hiccup in global markets showed, BRIC stock markets are not for the faint of heart. The MSCI Emerging Market Index dropped by almost 25% over six short weeks -- and India, Russia and Brazil fell by even more. Yet, those in-the-know realized that the May-June correction was different. The market sell-off did not expose underlying structural problems like they did in Asia in 1997 and Russia in 1998. As a result, the market bounced back strongly. Since the June 13th low, the MSCI Emerging Markets index has rallied 34% compared with a 17.53% gain for the worldwide benchmark.

The MSCI Emerging Markets index is up 26% this year, while the MSCI World is up only 16.7%. Net inflows into emerging markets as a whole have now hit almost $20 billion. That just about matches the amount for 2005 -- which itself was a record year. And with 48% of annual inflows into emerging markets coming in the fourth quarter of the year, this year will likely exceed 2005. A large chunk of that money will flow into the BRIC markets. The bottom line? Investing in BRICs will make you money. But hold on to your hat for a bumpy ride.

BRICs: Fact or Fad?

Skeptics may point out that BRICs have benefited disproportionately from a cyclical commodities boom. And analysts who go gaga over China's and India's growth rates forget that high-growth rates are typical of economies starting from a low base. Today's big numbers lead to exaggerated projections for tomorrow.

Focus on the BRICs also understates the importance of other large emerging markets like Mexico, South Korea, Turkey, Taiwan, South Africa and others. Jerome Booth of Ashmore Investment Management has dubbed the non-BRICs "Cement" -- "Countries in Emerging Markets Excluded by New Terminology." As Booth points out, if you want to build a wall, you need both bricks and cement."

Indeed, it's a big world out there, and it's getting bigger. Investment pioneers are trawling the last frontiers of the investment world in markets that are too small or insufficiently liquid to be included in the main benchmark indices. Vietnam is a hot new market. Investors have spent $123 million buying Vietnamese stocks over the past three months, and they now own 31% of the stock market. Other frontier markets include the Ukraine, up 570% since March 2003, Kenya, up 279%, and Bangladesh, up 79%. The lesson? BRICs are fine. But don't forget the mortar.

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