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The case for investing in Bric economies

This article is part of
Guide to Gaining Exposure to Bric Growth

With a focus on only four markets with clear drivers, Maarten-Jan Bakkum, senior emerging market strategist of ING IM, says Bric funds are easy to understand.

He adds the four markets are very liquid, which means that in an emerging markets downturn, the fund manager should be able to liquidate positions relatively easily.

Allan Conway, head of emerging market equities for Schroders, says Brics represent the “heart of the case” for global emerging markets and are likely to continue to drive emerging (and developed) growth for the foreseeable future.

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He points out that Brics include some of the world’s most populous countries - in total Bric countries have a population of almost three billion, representing more than 40 per cent of the world population.

Labour costs are low, he adds, with India’s hourly labour cost being $1 versus $37 in the US, and the Bric universe includes some of the most commodity-rich economies in the world with Russia representing around 20 per cent of world gas production.

Commodity consumers such as India and China are balanced by commodity producers such as Russia and Brazil, Mr Conway states. He also argues the long term structural case for Brics was positive.

“Over the last decade emerging economies have been growing 3 per cent to 5 per cent faster than the developed economies every single year and this growth differential has led emerging markets’ share of global GDP growth, paced by Bric markets, to increase to around 65 per cent.

“For example, China is expected to contribute nearly 40 per cent to global growth in 2013, which is more than the US. This represents a major structural change and is the result of the arrival of almost three billion people in Bric countries starting to acquire wealth and disposable income.

“In a break from the past, domestic demand growth rather than just export led growth now drives emerging economies and this structural driver has further to go.”

Investment spending as a percentage of global GDP is also greater in emerging markets than in the developed world, according to Mr Conway.

Mr Conway notes the increased significance of Brics was reflected by the weight of the MSCI Bric index in the MSCI AC World index, which has increased from 1.4 per cent at the end of 2004 to almost 5 per cent today.

“Debt levels, reserves and fiscal positions are generally healthy, which is in stark contrast to the debt ladened developed world. Bric markets are also attractively valued.

“While Bric markets have significantly outperformed their developed peers over the long term, the MSCI Bric index has lagged MSCI Word and MSCI EM indices over the last two years or so.

“On a weighed average basis, Brics are now trading around nine times PER, supported by earnings growth of more than 11 per cent, which is at a discount to both wider GEMs and the developed world.”