Analyzing the total valuation of the stock markets in Brazil, Russia, India and China, or BRIC markets, as compared to their combined gross domestic product, Morgan Stanley and Bloomberg conclude that the is still room for exponential growth in these emerging markets.
BRIC markets are valued at $1.71 trillion, which is only 25% of their GDP, whereas stocks in industrialized nations account for 81% of GDP.
BRICS are still “in the early stages of the rally,” Jeffrey Kleintop, chief market strategist at LPL Financial Services, told Bloomberg News. Recently, he said, he sold shares in industrialized nations to buy up stocks in developing ones, and he is now “overweight” emerging markets.
“You’re seeing a lot of run up [in the markets],” Kleintop admitted, “but it’s not gotten to the point where it is representative of the overall economy.”
John Praveen, chief investment strategist at Prudential International Investments, who is also “overweight” on emerging markets, agreed: “These markets have a long way to go.” In fact, even if there is a sell-off in any of these markets, Praveen said, he would use the opportunity to buy shares.
Alan Brown, head of investments at Schroders, is also bullish on emerging markets. “You want to be overweighted before the market drives those market capitalizations up,” he said. “You want to be committed to emerging markets.”
Still, it should not be forgotten how volatile emerging markets can be, and how when one falls in value, it has a domino effect on other markets. When the Mexican peso lost its value in December 1994, it caused a 24% decline in developing nations’ stocks. When Thailand permitted its currency value to drop in July 1997, emerging markets lost 37% of their value within six months. And when Russia defaulted on $40 billion of debt in August 1998, emerging market shares lost 19% of their value.
In the past six years, the Morgan Stanley Capital International Emerging Markets Index has surged more than fivefold—but on five separate occasions has lost 10% or more of its value.
In the six years since Goldman Sachs Chief Economist Jim O’Neill coined the BRIC acronym—he said the power four would rank along with the U.S. and Japan as the world’s biggest economies by 2050—the markets in those nations have gone sky-high. The Russian Micex index is up 781%, the Indian Sensex index has rocketed 508%, the Brazilian Bovespa has risen 395% and the MSCI China Index is up 501%.
What happened in the U.S. in that time? The Standard & Poor’s 500 Index rose 32%, while developed nations’ stock markets, exclusive of the U.S., doubled.