Still Follow The BRICs Road?

Includes: BBRC, BIK, BKF
by: Emerging Money

By Steven Orlowski

A recent article in Foreign Policy Magazine asked whether or not the BRICs nations are the future of the global economy. While the article acknowledges that they do in fact “matter” the implication for emerging market investors today is, as always, to properly set future expectations for returns from investments in these other emerging markets in the future.

The combined countries are big. FP notes that “in terms of population, landmass, and economic size…they make up 40 percent of the world’s population, 25 percent of the world’s landmass, and about 20 percent of global GDP. They already control some 43 percent of global foreign exchange reserves, and their share keeps rising. Their total GDP of close to $14 trillion now nearly equals that of the United States and is even bigger on a purchasing power parity basis.”

Of course big alone won’t increase a nation or group of nation’s economic impact on the world. FP points out that “the BRICs are part of the G-20, but not a true power bloc or economic unit within or outside it. None is fully accepted as “the” leader even within its own region. China’s rise is resented in Japan and distrusted throughout Southeast Asia. India and China watch each other jealously. Brazil is a major supplier of commodities to China and has relied on it for its economic success, but the two powers compete for resources in Africa.” The article also notes that there has yet to be a single free-trade agreement signed between the BRICs even though commerce between the emerging markets is increasing.

FP also points out that the “BRICs are also nowhere near economically cohesive. Russia and Brazil are way ahead in per capita income, beating China and India by a huge amount — nearly $13,000 compared with China’s $5,414 and India’s $1,389, according to 2011 IMF data.” The BRICs also “face stiff competition from other emerging powerhouses in the developing world. While China and India seemed to have a competitive edge for a while due to their low labor costs, countries like Mexico and Thailand are now back on the competitive map. And while growth in the BRICs seems to be slowing, many African countries are receiving more foreign investment, may be more politically stable, and are at long last moving away from slow or no growth toward much more robust economies.”

On a pure GDP basis “Goldman Sachs and others project China will overtake the United States in GDP before 2030. China, meanwhile, dwarfs the other BRICs, whose combined economic size isn’t expected to catch up to China during that period. The BRICs will approach the total size of the seven largest developed economies by 2030, and by the middle of this century they are projected to be nearly double the size of the G-7.”

All this data, and there is more in the piece, begs the question “where to invest?” As noted here at Emerging Money even the noted BRIC-creator Jim O’Neill of Goldman Sachs Asset Management coined the new acronym MIST (Mexico, Indonesia, South Korea, Thailand) over the summer. Is it time to move on?

Countries, like companies, can grow much more rapidly in the earlier stages of their development. China is a unique example of a massively populated country that has come very far but still has so much further to go. The majority of its population has yet to acquire many of the basic luxuries of developed nation populaces. This means the opportunity is still great, but the path to that opportunity is become less obvious the further along the developmental timeline China travels.

The same applies to the other BRICs as well as the MIST and frontier economies, hence the absolute necessity to separate the countries in our analysis. It may prove fatal to a portfolio to blindly think of any of these countries as a unit. Consider the European Union; they united voluntarily. The BRICs are not unified and therefore should be treated individually.