The Case for BRICs Remains Strong

07/02/2009 12:00 pm EST

Focus: MARKETS

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, says the BRIC countries are compelling investments even though they’ve rallied a lot from their lows.

For long-term investors, BRIC countries offer plenty of appeal for a variety of reasons.

  • The four BRIC countries—Brazil, Russia, India, and China—account for 42% of the world’s population.
  • BRIC countries have growing middle classes with rising income streams. Indeed, in 2002, BRIC countries had nearly 21 million households with annual disposable income above $10,000 (US). By 2007, more than 90 million households exceeded the threshold. Obviously, a vast and growing number of consumers and rapidly rising household incomes bode well for consumer spending, and that’s great news for a host of BRIC stocks.
  • Nearly all economies of developed countries are expected to contract in 2009. However, all of the BRIC countries are expected to have positive GDP growth in 2009. In short, the most resilient engines of global economic growth are the BRIC countries and other emerging economies. According to the International Monetary Fund, emerging economies are expected to account for 100% of the growth in world output in the three-year period 2008 to 2010.
  • BRIC consumers, because they tend to carry much lower levels of mortgage and household debt than consumers in developed countries, are less vulnerable to the credit crunch. BRIC banking institutions, too, are less vulnerable to the credit crunch.
  • The political and economic instability that has historically plagued BRIC countries, while not completely disappeared, has certainly lessened. For example, Brazil now carries an investment-grade rating on its debt. And the recent political victory by India’s ruling Congress Party—a victory that was followed by a one-day gain in India’s BSE Sensex index of 17%—and the world’s positive response to China’s $586-billion economic stimulus program illustrate the increasing comfort global investors have with BRIC financial, economic, and political policies.
  • The continued weakness in the US dollar, inflationary fears, and the desire for investors to generate higher returns in non-dollar assets should boost BRIC stocks, many of which have big exposure to commodity and natural-resources markets.
  • It’s worth remembering that all of the BRIC countries performed far worse than the US stock market in 2008. Brazil’s market declined 41%. Russia plummeted 72%. India’s market dropped 52%. And China fell 65%. Thus, despite their strong rebounds this year, BRIC stock markets are still well off previous highs.
  • Despite the run-up this year, BRIC stock markets are still reasonably valued. Russia, India, and Brazil all trade at price/earnings ratios similar to the US And while China’s stock market does trade at a premium to the US, China’s economic growth will swamp that of the US this year and for the foreseeable future.

Bottom line: The case for a greater allocation to BRIC countries is compelling. Yes, emerging markets may have a higher risk profile. But growth prospects should compensate investors for assuming greater risk.

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