BRIC by BRIC: Why Investors Should Look Abroad to Build Their Portfolios

By Pran Tiku
Investors hear it all the time: developing markets represent an enormous risk. Whether it is a nation’s lack of transparency, of regulation and rule of law, imperfect accounting standards, unstable currencies and high inflation—the litany of risks can be long and troublesome—it seems there has always been a reason to forgo investing in such markets.

Until now.
As the US economy slips into the early stages of recession, posting miniscule rates of growth amidst the housing bubble and falling dollar, many investors are seeking to place their capital abroad, and have turned to what we like to call the 'Six Sizzling Markets' (Brazil, Russia, India, China, South Korea and Mexico) as primary alternatives. Achieving growth nearing double-digits in some instances, these emerging economies are ripe with favorable conditions whether expressed in sheer demographics, infrastructure or an abundance of natural resources?that have historically proven to be the catalyst for consistent economic expansion.

Though the United States remains the world?s richest economy, with gross domestic product (GDP) of around $12.5 trillion, it is clearly not the fastest growing, with GDP typically expanding by 2% to 3% a year. China is a comet by comparison, with GDP typically growing by 8% to 10% a year. Though China's economy is today much smaller with GDP of $2.2 trillion?and the remaining BRIC +2 countries are miniscule by comparison, with GDPs ranging from $760 billion to $800 billion, research by the investment firm Goldman, Sachs & Co. suggests that by 2040 the GDPs of the four BRIC economies could exceed the GDPs of the US, Japan, Germany, France, UK, and Italy?... combined!

How is this possible? Key factors that will support this growth include huge reserves of natural resources (Brazil, Mexico, and Russia) for export markets, and a large and well-qualified work force (particularly in India and China) with relatively low wage levels. Korea's economy will also grow, as its more-advanced industries will benefit from increased trade and services with China.

Economists also expect growth in domestic consumer demand within the 'Six Sizzling Markets,' stimulated by increases in income across broad categories of their populations. When a country's national income (GDP) is spread out among its citizens rather than concentrated among a smaller subset of the population, the result is sustained domestic demand for goods and services. The ever-widening expansion of the middle classes within these 'Six Sizzling Markets,' particularly China, will only further support for greater GDP growth.

Demographic changes can also contribute to stronger economic growth. China is the world's largest country with a population of around 1.3 billion, followed by India with 1.1 billion. Brazil and Russia are also in the top ten based on population size, with Mexico ranking 11th and Korea, a small country geographically, ranking 24th. The United States is the third most populous country, yet its population is less than one-fourth that of China. By 2020, China and India together are expected to have grown by 367 million people?more than the entire U.S. population! Countries with large populations have the potential to develop large domestic consumer markets, making them less dependent on exports.

Though risk is an inherent aspect of any investment, particularly in emerging economies, the investor who dedicates his or herself to understanding the unique characteristics of these countries will find themselves with a distinct advantage as they seek the highest potential price appreciation. Instead of quick snapshots and hollow sound bites, meaningful one day and useless the next, the savvy investor will come to appreciate each country's unique historical and cultural context.

This level of understanding will readily show that all six countries are becoming aware that in order to sustain growth, they will need to participate in open trade. They're making huge advances by engaging in trade pacts and tearing down barriers that have, for the last several decades, characterized their respective trade policies. India, for example, began opening up its economy in the early '90s, and China has been on this path now for over two decades. The restrictions that still remain are those that governments feel will hurt nascent industries that are so far unable to compete.

Investors have come to learn that these markets now offer more stability than was recently thought. Recently, China's stock market was down 20 percent from its peak, which may seem like a lot, but when you consider that China's FTSE/Xinhua index has doubled on an annual basis over the last three years, it doesn't seem so bad. In the past, you might have had that growth but with a drop of 100 percent.

Ignore the stereotypes. The 'Six Sizzling Markets' have now become long-term engines for growth. And in spite of all the volatility, which has certainly not escaped the US economy as of late, these markets will continue to offer investors a golden opportunity to boost their portfolios.

Pran Tiku is author of Six Sizzling Markets: How to Profit From Investing in Brazil, Russia, India, China, South Korea and Mexico (Wiley 2008) and founder of Peak Financial Management, Inc., Waltham, Massachusetts. He has been providing clients with expert investment analysis for over twenty-five years and has been named by Fortune magazine as one of the USA?s top wealth advisors. Contact Pran at www.peak-financial.com or call (877) 567-9500.