Can the Brics bounce back?

Julian Knight and Simon Read report on the rise of Brazil, Russia, India and China
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The Independent Online

If you're not invested in Brics, you could be forgiven for wondering what you're missing out on. But it's simply an acronym for the countries Brazil, Russia, India and China which were identified in 2001 as being the leading nations among a group of emerging economies.

The term BRIC was coined by Goldman Sachs's head of global economic research, Jim O'Neill. He forecast that the countries' GDP growth could outpace the rest of the world, with the GDPs of China and India in particular set to surpass those of the major Western economic powers and dominate the global economy within 50 years.

The theme was taken up by others, leading to a wave of Bric funds being launched. The countries themselves joined the bandwagon, holding the first Bric economic summit this summer in Yekaterinburg, Russia. But the countries have fairly little in common, beyond their size.

Brazil's economy, for instance, is based on agriculture as well as oil, while Russia likewise is an oil- and gas-rich nation. India's economic growth is based on IT and services – think of call centres – while China's manufacturing industry make it the world's biggest exporter. Investing in a Bric-based fund, then, means buying into the argument that these four emerging countries offer the best opportunities for growth despite their differences.

That's not a view that Threadneedle's head of global emerging market equities, Julian Thompson, subscribes to. "It's true that the rise of emerging markets will be extremely important, but we don't think it's a good idea for investors to be limited to the Bric countries. There are lots of countries with good prospects, such as Indonesia, so we think it's better to offer a general emerging markets fund."

Ben Yearsley of independent financial advisers Hargreaves Lansdown adopts a different approach. "While I think investors should have exposure to the Bric economies, I prefer buying funds invested in individual countries, rather than a broad-base emerging markets fund." Mr Yearsley invests in a Russia fund, a Latin America fund, several Chinese funds and an Indian one.

"Some of these economies offer the best growth potential for the coming decade," says Mr Yearsley. "They are generally not saddled with the problems associated with many of the more developed countries. For example, they don't have pensions problems because they don't have massively ageing populations. They don't have the banking problems of the West either."

Brics and emerging market funds could form up to 25 per cent of an investor's portfolio for the foreseeable future. His recommendations? "If you want a Bric fund, use Allianz Bric Stars. If you want an emerging markets fund, use First State Global Emerging Markets Leaders. If you want individual funds, I'd go for Jupiter China, First State Latin America, First State Indian Subcontinent and Neptune Russia and Greater Russia."

Of the four Bric countries, Brazil is favoured by Adrian Lowcock of advisers Bestinvest. "The Brazilian economy is defined by the commodities industry and in particularly oil. The stock market is dominated by two companies which operate in the oil sector. Therefore, to some extent, investment into a Bric fund will be influenced by the performance of that sector; with Russia and Brazil on the supply side with China and to a lesser extent India providing the demand." He also highlights the First State Latin America as a way to profit from the potential growth. "It's a new launch so there is not much to report in terms of performance figures; however, it has returned 17 per cent in three months," he points out.

But investing in emerging markets is not for the faint hearted. "You can make a lot of money in emerging markets but you can also lose it in double quick time," Darius McDermott, managing director of Chelsea Financial Services, said. "Last year, for example, the stock markets in the developed nations fell 30 per cent but emerging markets more than 50 per cent. We give investments a risk rating between one and 10: one is the least risky and 10 the most. Emerging markets are definitely a 10. You have the potential for sharp currency moves eroding returns, geopolitical risks and, to be frank, fraud in these economies," Mr McDermott said. Only those investors with money already in savings accounts and in UK stock market funds or corporate bond funds should consider taking the emerging markets plunge.

"You have to build your way up from cash through UK funds, and only when you have substantial holdings should you consider emerging markets," Mr McDermott said. What's more, for those nearing retirement who cannot afford to remain invested for the long term, it may be best steering clear of emerging markets. In fact, many independent financial advisers reckon that investors should have a maximum of between 5 and 10 per cent of their portfolios in these high-risk funds. However, a smaller band of IFAs think investors would be wise to invest more as the long-term economic story of countries such as Brazil, India, China and Russia is a good one. "It's all about your attitude to risk, but I know some clients who really believe in these countries and are heavily invested," Mr McDermott said.

Brazil

Economic growth in Brazil is not as impressive as that recorded by China. However, the South American giant has fared better than expected in the face of the recession gripping Europe and America. “This year we expect growth in Brazil to be flat, but that is no bad thing. Crucially, commodity prices, on which the economy relies heavily, have bounced back and the consumer sector looks robust without high levels of personal debt or inflation,” said Bryan Collings, the manager of Hexam Capital’s Emerging Markets Fund.

Investors should have a “healthy dose of Brazil” in their portfolios, added Mr Collings, as share prices could be inflated by an influx of US-based investors. “More US cash is now going to Brazil than India and this is helping transform the stock market and boost the domestic investment culture.” However, this is not to say that there aren’t dangers inherent to investing in Brazil. “Commodity prices are key to the prospects of the economy, which makes it a little vulnerable, but with China still going ahead, there is a floor under those commodity prices,” Mr Collings said.

Russia

At the start of the year, with the Russian stock market nose-diving, there were those who thought Russia should be removed from the exclusive Bric club. Jim O’Neil from Goldman Sachs, who coined the term Bric, was one who questioned Russia’s right to be considered an emerging economic powerhouse rather than a perennial basket case. Bryan Collings of Hexam Capital said: “The main problem with Russia is the volatility. There can be dramatic rises and falls and that frightens some investors. The economy is dependent on commodity prices and often, when these fall, you see selling of the stock market. Unlike in the West, where you have big pension and investment funds that buy when share prices fall, in Russia there is no natural brake. As a result, when prices fall, it can be substantial and fast.” But if the world economy does pick up speed next year, Russia could be in a strong position. “

With its excellent natural resources and large population, Russia is well placed for outperformance as the world economy recovers,” Mr Collings said. “It may be riskier than the other Bric countries, but that can be a good thing if it’s within the confines of a larger emerging-markets or Bric fund.”

India

Like China, India seems to be successfully riding out the world economic storm. The key is that India has a balanced economy with companies able to appeal to a strong domestic market when its exports start to dip. “A lot has to do with the growth of the middle-class, educated workforce and infrastructure investment,” said Charlie Awdry from the Gartmore emerging markets team. And the latest signs are that the country’s consumers have continued to spend. “After a brief blip, car and motorcycle sales are on the up again, interest rates are low and business can find the credit it needs to invest,” said Teera Chanpongsang, the manager of Fidelity’s India Focus fund. In addition, the Indian government is moving to liberalise the economy further and reduce the budget deficit. But India’s stock market relative to the other Bric countries is quite expensive, with share prices trading around 15 times company earnings. “The Indian stock market is at a premium but I expect a lot of companies to upgrade their earnings expectations which should balance this out. Overall, India has been one of the best performing emerging markets over the past 10 years, but a long-term approach has to be taken,” Mr Chanpongsang added.

China

China has a massive population and has toppled the US as the world’s largest exporter. Recent figures suggest that the Chinese economy has weathered the worst of the world downturn and is returning to its near double-digit growth. “The long-term economic drivers, such as demographics and infrastructure, are all in place and they’ve been supplemented by the fiscal stimulus package the Chinese government put together last November,” said Pinakin Patel, a client portfolio manager at JP Morgan.

But there remain worries that the country is too in thrall to state interference. “There is no doubt the state is highly involved in the day-to-day running of people’s lives, but having the government at the helm of economic growth has been positive. It has been able to push through progress reasonably quickly,” Mr Patel said. Martha Wang, a portfolio manager at Fidelity’s China Focus fund, said there should be further positive effects from the stimulus measures. “But stock markets in China are likely to stay volatile in the near term as the global economic and investment outlook is still uncertain,” she warned. “Chinese companies could outperform world equities over the longer term, given China’s structural growth potential.”

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