Can the Bric countries growth story be sustained?
In 2001, Goldman Sachs Investment Research team created the Bric (Brazil, Russia, India, China) concept in an effort to identify the world’s fastest growing economies. By 2050, it was forecasted that the Bric economies could collectively rival the G7, in terms of share of global growth. GIR now believes this timeline is conservative the speed of development is such that the Bric economies could rival the G7 by 2032.
Over the last decade, the MSCI Bric Index returned 185 per cent (cumulative), outperforming the MSCI Emerging Markets Index by 30 per cent and contrasting sharply with the 2 per cent (cumulative) decline in the MSCI World Index . We believe this pattern of Bric equity outperformance could repeat itself over the next decade as the superior growth trajectory of the Bric markets should continue to translate into superior equity returns over the long run. It appears we are in the midst of a seismic shift of global growth from developed to developing markets and we believe investing in Bric countries is key to increasing emerging markets equity exposure.
The long-term case for the development of emerging markets appears quite clear, but in the immediate term, markets continue to be volatile, and we find many clients are questioning whether now an appropriate time to be increasing exposure to the Brics?
In the 1980s and 1990s, Bric countries’ balance sheets were over-levered and burdened by large deficits financed by heavy external borrowing. This resulted in several emerging market-based crises, but also served as a lesson for many emerging market central banks. Their conservative behaviour over this past decade was reflected in the cleanest balance sheets in their histories. This policy allowed the Bric countries far greater flexibility in facing this recent financial crisis than previous ones. In fact, Bric countries benefitted from greater monetary flexibility than most developed markets, better positioning them to weather the downturn.
In previous crises, capital outflows from the Bric markets typically forced local central banks to raise interest rates to maintain financial stability. For the first time in history, however, Bric economies have been able to cut interest rates in response to adverse external shocks. Conversely, they maintain the ability to raise rates as necessary in response to any inflationary pressures from rapid growth. Recent speculation that China and India may be contemplating increases is seeding investor angst, but we view this as a healthy sign that these economies are functioning properly and will support sustainable long-term growth.
A similar story is apparent in the corporate sector. Fundamentals are robust as evidenced by their returns on equity, which are above their historical levels and their developed market peers. This improvement has come with significant deleveraging such that debt/equity ratios of Bric companies are now substantially lower than those of developed market companies. Bric corporations are also posting strong free cash flow, a particularly valuable attribute while credit markets remain tight.
The strong rally in 2009 lifted Bric equities from crisis-induced lows back to long-term average valuations and are comparable to those for developed markets, despite the Brics’ significantly stronger growth profile. We expect this growth to be fuelled by:
• domestic consumer demand
• robust infrastructure spending
• technology-driven improvements in productivity
The Bric countries present an attractive way for investors to increase exposure to emerging markets. Our economists suggest that over the next few years, the Bric countries will grow faster than other emerging markets and at a significantly higher rate than the developed economies. An allocation therefore represents an overweight to the world’s fastest growing economies and the outlook looks very constructive indeed.
