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New economic power-houses emerge

Given the diversity of the numerous “emerging market” economies, it is challenging to define the term. Generally, countries in a transitional phase between developing and developed are seen to be the emerging markets. The best-known examples are Brazil, Russia, India and China, which are collectively known as the BRICs. In this article we look especially at the BRICs and their increasing role in the world economy.

By Brien Donnellon

The term “BRIC” was prominently used by Goldman Sachs in 2001, when they suggested that by 2050 the combined economies of the BRICs could eclipse those of the richest countries in the world combined. The BRICs currently account for more than a quarter of the world’s land area and more than 40 per cent of its population. It is likely that these ­nations will organise themselves into an economic trading association, similar to the European Union. An indication of this ­desire to capitalise on their growing economic power was demonstrated during the 2009 BRIC summit in Russia, when they issued a declaration calling for the establishment of a multi-polar world order.

Change driving growth

The Goldman Sachs paper Dreaming with BRICs: The Path to 2050 also recognises the changes that Brazil, Russia, India and China have made to their political systems, embracing global capitalism. Goldman Sachs predicts that China and India will become the dominant global suppliers of manufactured goods and services, while Brazil and Russia will dominate as suppliers of raw materials.

Logically, a powerful economic cooperation would see Brazil and Russia as the commodity suppliers to India and ­China. Even today, the BRICs have a bigger share of world trade than the United States. China – estimated to be the world’s largest goods exporter last year – has been complemented by ­India’s software and back-office exports, Russia’s oil and gas, and Brazil’s globally competitive farmers.

Many economists predict a massive expansion of the middle classes in the BRIC nations. It is calculated that in 2025 the number of people in BRIC nations earning over $15,000 may reach over 200 million. This indicates that a huge pickup in demand will not only be restricted to basic goods, but also luxury goods. It is expected that in 2025 China – and then a decade ­later, India – will begin to dominate the world economy.

Not all change

The race for economic growth is being clearly won by the BRICs; however, the average wealth levels of individuals in the major developed countries will continue to far outstrip the BRIC economic average. Goldman Sachs estimates that by 2025, the per capita income in the six most populous EU countries will ­exceed $35,000 – whereas only about 500 million people in the BRIC economies will have similar income levels.

The potential in the BRIC markets will continue to affect world markets, as multinational corporations attempt to take ­advantage of them by producing manufactured goods affordable to consumers. India and China have already started making their global presence felt in the service and manufacturing sectors.

Brazil

Over the past 20 years, Brazil has transformed from an average-performance, agricultural country, to a superpower. It has ­become the world’s biggest exporter of meats, such as beef and chicken, as well as of foods such as orange juice, green coffee and soya. It is also the fourth biggest exporter of maize and pork. This success has been almost entirely achieved through efficient management and the development and application of technology. Brazil is expected to become a major oil producer and ­exporter, having recently made huge oil discoveries.

Russia

Russia’s growth projections may be hampered by a shrinking population, but strong convergence rates work to the country’s benefit. By 2050, Russia’s per capita GDP is forecast to be the highest of the BRICs and comparable to the G7. It is very ­commodity rich and relies heavily on exporting uranium, natural gas, oil and aluminium.

India

India has 10 of the 30 fastest-growing urban areas in the world, and it is estimated that 700 million people will move to cities by 2050. This will have significant implications for demand on ­urban infrastructure, real estate and services. Goldman Sachs predicted that from 2007 to 2020, India’s per capita GDP will quadruple in U.S. Dollar terms, and that the Indian economy will surpass the United States (in USD) by 2050. Despite this, India’s per capita income will be significantly lower than the others.

China

The two most important sectors of the economy have traditionally been agriculture and industry, which together employ more than 70 per cent of the labour market. Due to advances in technology, industry is growing at a quicker rate than agriculture. The difference between the two sectors has caused an economic-cultural-social gap between rural and urban areas.
China is the world’s largest producer of rice and a major ­producer of wheat, corn, tobacco, soya, peanuts and cotton. ­China’s mineral resources are estimated to be among the richest in the world, but they are still underdeveloped. The ­country also produces coal and crude oil, but domestic supply cannot satisfy demand and they are forced to rely on imports for the foreseeable future.

BRICs and investing

The recent Dubai debt issue has served as a strong reminder that emerging markets are vulnerable. There are clear risks, but investors know that money is to be made in a growing market. Let’s take a look at three emerging market investment opportunities:Clariden Emerging Markets Equity Fund (USD): The investment objective of this equity fund is to invest globally in companies from various sectors in emerging markets. It is a Luxembourg-based fund and was launched in 2009. Its benchmark is the MSCI Emerging Markets Index (USD). In 2007 it gained 63 per cent and in 2008 lost 61 per cent. In 2009 it gained 98 per cent and in 2010 is currently trading slightly in minus. The largest holdings include Samsung Electro, Citi Wts12, IRPC-F and Petkim Petrokimya. It is invested heavily in IT, industrials, materials and the financial sector. Taiwan, China, Turkey and South Korea are the main countries of investment.DWS Invest BRIC Plus LC (EUR): The investment objective of this equity fund is to invest at least 70 per cent of the sub-fund assets in the equities of companies with strong ties to the BRIC countries. It is also a Luxembourg-based fund and was launched in 2005. Its benchmark is the MSCI Emerging Markets Index (USD). In 2007 it gained 37.5 per cent and in 2008 lost 60.7 per cent. In 2009 it gained 82 per cent and in 2010 it is currently breaking even. The largest holdings include Cia Vale Do Rio Doce, China Mobile, Southgobi Energy and Gazprom. It is invested in energy, consumer staples, industrials and the financial sector. The main currencies include the Hong Kong Dollar, the U.S. Dollar and the Brazilian Real.Aberdeen Global Emerging Markets Equity Fund (USD): The investment objective of this equity fund is a long-term total return, investing in emerging market equities. It too is a Luxembourg-based fund and was launched in 2003. Its benchmark is the MSCI Emerging Markets Index (USD). In 2007 it gained 32.9 per cent and in 2008 lost 43.09 per cent.In 2009 it gained 79.9 per cent and in 2010 is currently ­trading slightly in minus. The largest holdings include China Mobile, Vale, Petroleo Brasileiro and Samsung Electronics. It is ­invested heavily in the financial sector, but also energy, consumer discretionaries and IT. Brazil, China and India are the main countries of investment.To summarise, many investors are wary of emerging markets, due to the significant risk and volatility that comes with this ­asset class. However, the mainstream market dips of recent years are prompting investors to take a second look and reconsider their strategies.