In 2001, Goldman Sachs' chief economist Jim O'Neil coined the term BRICs to describe four of the most important emerging-market economies: Brazil, Russia, India and China. Today we believe the long-term outlook for these economies is stronger than ever, presenting an attractive way for investors to increase their emerging-market exposure.
In fact, our Global Investment Research team believes that over the next few years, the BRIC countries are likely to grow faster than other emerging markets and at a significantly higher rate than the developed economies. By 2032, we estimate that the BRIC economies could rival the G7. Indeed, over the last decade, the MSCI BRIC Index returned 276% (cumulative), outperforming the MSCI Emerging Markets Index by 162% and contrasting sharply with the 2% (cumulative) increase in the MSCI World Index for the decade ending December 2009.
The BRICs are geopolitically and economically unique. There is an appealing symmetry in the fact that Russia and Brazil have an abundance of the raw materials that India and China need to grow and improve their infrastructure. Three of the four countries have a BRIC counterpart as one of their top two trading partners, further reducing their dependency on developed countries.
Solid and improving fundamentals are the foundation for the BRICs' growth story. Strong BRIC sovereign balance sheets allowed central banks greater flexibility during the recent financial crisis. BRIC corporate fundamentals are equally robust, as shown by their returns on equity, which are above their historical levels and developed market peers. Importantly, this improvement has come with significant deleveraging so that debt/equity ratios of BRIC companies are now generally substantially lower than those of developed market companies. BRIC corporates are also posting strong free cash flow, a particularly valuable attribute while credit markets remain tight.
The demographic equation is also balanced. The emerging middle class-people earning over $15,000 per year-is expected to grow by 200 million people in the BRIC countries by 2025. That's equal to the combined populations of Germany and Japan.
There are always risks involved with investing in emerging-markets equities. We believe it is advisable to avoid stocks where "future fantasies" are built into the price, or companies that are overdependent on exports to developed markets. A better bet may be those that can thrive on the robust internal economy that could increasingly fuel the BRICs engine of growth. Ultimately it is worth remembering that markets may be driven by short-term sentiment. But over the long term, we believe fundamentals will win. In the BRICs, the long-term fundamentals supporting this growth look very solid indeed.
Kathryn Koch is a senior portfolio strategist at Goldman Sachs Asset Management in London.
