BRICS: Emerging Economy Investment Opportunities

The most recent Resource Investing News Survey revealed that our readers are taking a cautious approach to resource investment given the uncertainty plaguing the world’s financial markets. Although early in 2011, optimistic investors stepped back into the resource sector with 89 percent of survey respondents reporting that they had invested in resource companies over the past year -up from 70 percent in November of 2010– only 63 percent of respondents feel confident enough to invest further in the next 6 months.

 “What do you feel is the biggest risk for resource investors?”

When asked what readers considered the biggest risk for resource investors, many replies highlighted growing inflation and slowing economies in the BRIC nations. Also troubling investors is the possibility of a recession in China.

The term “BRIC nations” or “the BRICs” — which refers to the grouping of Brazil, Russia, India and China as the four globally important developing economies — was first coined in 2001 by Goldman Sachs global economist Jim O’Neill. In 2001, O’Neill argued that by 2050 the combined economies of these rapidly developing nations would surpass the combined economies of the world’s current wealthiest economies. A 2010 Goldman Sachs report forecast that the BRIC nations could account for 41 percent of global market capitalization by 2030, with China—currently the second-largest economy—eclipsing the United States to become the world’s largest equity market.

Over the past decade, the BRIC nations have helped to create significant investing opportunities in the resource sector by initiating trillions of dollars worth of infrastructure development projects, and spurring enormous demand for natural resources. Their growing middle classes and nearly 3 billion consumers have fueled economic growth on a grand scale. Following the 2008 financial crisis, the BRICs may have suffered hugely but, they recovered quicker than many of the world’s most developed and wealthy economies.

Now an official international political organization, the BRIC member nations welcomed South Africa to the fold in 2010; Goldman Sachs economist O’Neill protested the inclusion pointing out that the African nation is “not of the same economic magnitude of the other BRICs.”

BRIC nation performance

“The ‘BRIC’ stocks were rockers in the middle of the past decade with markets in Brazil, Russia, India and China tripling or more between 2003 and 2008 when the financial crisis laid them,” explained Forbes staff writer John Dobosz. “Big rebounds since March 2009 were cut short by debt issues in Europe and fears that the US could slip back into recession.”

Despite the impressive recovery in 2009 following the 2008 crash, the financial contagion in the Eurozone this past year greatly diminished risk appetite across all markets including the resource sector as investors anticipated stalled infrastructure projects and slowing industrial demand.

Can the world depend on the BRIC nations to keep the global economy from stagnating? Not everyone thinks so. “Even with three decades of growth and 1.3 billion people, China’s economy is still just over 8.5 percent of the world’s (as of 2009), so whatever it does pales in significance compared to what goes on in the rich world,” writes Ha-Joon Chang, a globally respected economist who specializes in development economics, in a recent commentary for The Guardian. “As for India and Brazil, they are still small fries, with 2.2 percent and 2.7 percent of world output, while South Africa, with 0.5 percent of world output, is a mere smudge on the world economic map. All these countries also suffer from huge internal tensions due to high inequality and, in the case of India, growing corruption.”

Still, many analysts remain confident the BRIC nations will continue to lead the global economy forward. In an interview with Economic Times reporter Deeptha Rajkumar, HSBC AMC global macro and investment strategist Phillip Poole said the recent market sell-offs in the BRIC nations resulted from the risk aversion created by the financial crisis in the developed markets rather than any inherent failings of emerging economies themselves.

“The BRICs are vulnerable to a big blow-up if Greece defaults and Europe melts down, but the emerging markets always come back and right now they just offer more promise than developed markets,” Win Thin, global currency analyst with Brown Brothers Harriman, told Reuters. “Once the dust settles it seems like the natural flow will be to the BRICs and other emerging markets.” Brown Brothers Harriman, the largest privately owned bank in the US, expects emerging markets including the BRICS to grow stronger in 2012.