Resurgent BRIC winning global race for investments

The world's four biggest emerging economies are grabbing growing volumes of global capital flows, with firms and fund managers increasingly viewing Brazil, Russia, India and China (BRIC) consumer demand as a high-return, relatively safe investment bet.

BRIC, with 40% of the world's population, account for about 20% of its gross domestic product, a share Goldman Sachs says will rise to equal that of the G7 industrialised countries as early as 2032.

There was a sign this year of the shape of things to come as China overtook the United States as the world's biggest car market. And as incomes of 2.5 billion people steadily rise, company profits as well as stock markets will feel the effect.

No surprise that cash — direct investment and portfolio capital — is increasingly gravitating to these giants. Fund tracker EPFR Global says BRIC-geared equity funds absorbed almost $20 billion in January to November 2009. This is double 2007 levels and equivalent to 40% of what was taken by emerging stock funds, some of which also went to the BRICs.

"The trend of BRIC outperformance has been very powerful and should continue as growth is concentrated in these markets," said Martial Godet, who helps manage €37 billion in emerging stocks at BNP Paribas Asset Management in Paris.

"We are betting on the largest, highest-growth markets with the biggest populations and good liquidity levels."

To capitalise on BRIC consumer demand, Goldman Sachs suggests investing in a basket of 50 developed market stocks positioned to benefit from the BRICs theme, and one of 50 BRICs companies that are likely to emerge as global market winners.

Already, BRICs are outgunning broader emerging stocks — the MSCI BRIC index is up 90% in 2009 versus 70% for MSCI EM, with only China lagging.

An investment in Brazilian stocks in 2000 would have quadrupled by now while cash put in emerging stocks would merely have doubled. And a buyer of world stocks would have lost money.

As monetary policies start to tighten next year, investors on average expect BRIC stocks to rise 20-25% in 2010 after the near triple-digit returns of 2009.

But in future the BRICs as the most liquid emerging markets will gain most from higher allocations to emerging markets.

Goldman Sachs economist Jim O'Neill, who first came up with the BRIC concept, projects the BRICs to comprise almost half global stock markets by 2050 from less than 10% now. He says it is inevitable more cash will move to the BRIC markets.

"If you think of a GDP-weighted benchmark, it would be considerably higher than the current MSCI-type ones," O'Neill said, referring to indices that use GDP to weight countries, rather than the usual practice of weighting by market value.

"For some asset managers, especially the sovereign wealth funds, this is what they are moving towards."

Fund managers say cash will go where growth is — or where the value is. With China and India posting the highest growth in the world, and Russia trading at a 40% discount to emerging markets, the bloc should remain an investment magnet.

Consumer demand is seen as key to the post-crisis global recovery, and at the heart of the BRIC story is the consumer.

This is the main driver behind the surging tide of direct investment into the BRICs which took in 16 percent of global direct investment flows in 2008. This is a third up from the previous year, a total $265 billion, or over half of what was received by the 16-nation European Union, United Nations agency UNCTAD says.

Take China's car market which made headlines earlier this year. With 10 cars per 1,000 Chinese, there is a lot more room for sales growth than the US which has one car for two people.

What is happening is a rebalancing of global consumption, away from advanced economies and towards emerging markets, says Goldman Sachs, a process expedited by the shock caused to household wealth and employment by the financial crisis.

GS predicts Chinese household consumption to rise 10% in 2010, with Brazilian and Indian demand also up over 5% while spending in the developed world remains flat.

Global corporates have cottoned on. Japanese electronics firm Panasonic for instance said last month it aims for 15-20 % annual sales growth in the BRICs to compensate for falling demand from Japan's shrinking population.

No wonder then that firms are rushing to set up production in the BRICs — UNCTAD's 2009-2011 investment outlook survey found all four countries to be in the top five most favoured investment destinations with China topping the list.

"What investors in BRIC are saying is: we believe in GEM (global emerging markets) but to a great extent, what's happening in GEM is in these four countries," said Alex Tarver, who helps manage $1.9 billion in BRIC stocks at HSBC. "It is a microcosm and one that's large enough to drive regional growth."