The Death of BRICS is Greatly Exaggerated

Please forgive me, Mark Twain, for usurping your quotation. But I’ve seen so many outrageous reports calling for the ultimate destruction of these emerging markets that I just couldn’t resist!

Goldman Sachs first coined the term, “BRICs,” to denote the emerging market economies of Brazil, Russia, India and China. They were seen as viable alternatives when investing in the developed West became overheated. And during the late 1990s and early 2000s, BRICs were the buzzword of investing, as investors could just not get enough of the shares of these countries’ stocks.

And, of course, what followed is the usual case for over-hyped stocks. The BRICs crashed and burned along with many other emerging market shares. But what many investors don’t realize is that—while the media gave these shares up for dead—they actually outperformed after the recession of 2008.

Certainly, they’ve taken a back seat to the enormous gains of global markets in the past year and a half, but don’t be surprised to see them resurrected once again.

As Roger Conrad notes in our Spotlight Stock this month, emerging economies—especially China and India—still hold great potential for growth. After all, the BRICS countries (now including South Africa) represent almost three billion people (43% of world population) and have a combined nominal GDP of $14.8 trillion (about a quarter of global income), 17% of world trade, and an estimated $4 trillion in total foreign reserves. That’s a lot of economic power!

In the past two decades—according to the International Monetary Fund (IMF), BRICS’ share of world GDP has increased from a little over 10% to more than 25%. And their share of world trade has also risen from 3.6% to more than 15%, led by China (from 2% to over 9%).

India has also prospered, growing its trade share from 0.5% to 1.8%. India’s fortunes have been very volatile over the years, but in the past year, its Sensex stock market has seen momentum and healthy appreciation. The country has favorable demographics—it’s forecast to overtake China’s population by 2025—and a fast growing economy. Its strong performance has been credited primarily to Narendra Modi, who recently became India’s new prime minister.

Mr. Modi is expected to boost employment and improve the country’s outdated electricity and water systems, as well as open its retail sector to foreign investments. Yet, the P/E of India’s market is just 15.7, below its historic average valuation of 18.9, which bodes well for future appreciation.

As for China, on June 4, the Shanghai Composite Index closed at 2024, a 1,924% rise since the market opened 25 years ago. However, that rise has come with significant volatility, and the index is down 66% from its high of 6092 on October 16, 2007. Yet China’s economy continues to move along at a pace of about 7% annual growth. That’s down from the days of 10% GDP rises, but 7% is nothing to sneeze at—and is considerably higher than most other world economies.

American companies are not ignoring that growth. Last year, Yum! Brands saw its sales grow 19% in China versus just 1% in the U.S. Boeing forecasts that over the next 20 years, China will need 5,000 new airplanes, totaling about $600 billion. And Merck is also building a $1.5 billion research and development facility in Beijing. That sounds very promising to me!

While I don’t advocate that you devote a huge portion of your portfolio to emerging market shares, now may prove to be an opportune time to add some heavily discounted issues to your holdings.


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