When now-retired Goldman Sachs (NYSE:GS) economist Jim O'Neil first dubbed the four nations of Brazil, Russia, India and China the “BRIC” countries back in 2001, he made one of the gutsiest long-term global macro-economic calls - that these nations would be the biggest drivers for future global growth. O'Neil's prediction has, for the most part, come true. Presently the combined GDP output of the BRICs equals half of the entire 34 country based Organization for Economic Co-operation and Development (OECD). More importantly, the stocks within the nations- as represented by the MSCI BRIC index- have risen by more than eight times what the S&P 500 index returned during the past decade.
However, things aren’t going so swimmingly for the four nations of Brazil, Russia, India and China. Returns for the BRICs have been less than stellar lately. That poses the question- Have the BRICs cracked or are they a huge value for portfolios?
SEE: Understanding BRIC Investments
A Short-Term Sidestep
Featuring large growing populations, rising domestic wealth and vast commodity resources, the BRICs have managed to capture the emerging market spotlight and rise to the top. Overall, the four nations are poised to be the next leaders on the world stage. Goldman Sachs, estimates that the group will grow to become four of the six largest world economies over the next 38 years. So far, the BRIC bloc has lived up to that promise.
That is until recently, when potential cracks began to form.
Much of the BRICs prominence has been driven by the notion of exporting something- whether it be finished goods or raw materials- to the developed world. With stymied growth in the U.S. and recessions/austerity budgets driving the European Union, the four horsemen of the emerging world have suffered. As major commodity producers, both Russia and Brazil have seen their fortunes fade as energy and minerals prices have dropped. Likewise, India’s tech-driven outsourcing market has been hurt as developed market companies still continue to put-off IT spending. Finally, rising costs of labor in China has made the nation less of a manufacturing sector as well.
These factors- plus China’s efforts to cool inflation as well as India’s problems with infrastructure- have caused the BRICs to under-perform in recent years. The Brazilian and Russian stock markets have lost roughly 15% and 13%, respectively this year and China has managed to fall around 3%. This compares to the nearly 15% gain for the SPDR S&P 500 (ARCA:SPY).
Yet, despite these drops much of the long-term growth story of the four nations continues to remain intact- specifically their consumer stories. As these nations have grown and continue to do so, they have begun to switch from purely exporting countries to ones with vibrant consumer centers. Incomes continue to rise as work forces expand and life expectancies are rising. Together, the BRICs account for about 42% of the world's population. That’s a lot of potential consumer power.
SEE: Potholes In The Golden BRIC Road
Laying A Foundation With The BRICs
While the four nations make the bulk of broad-based emerging market funds like the Schwab Emerging Markets Equity ETF (ARCA:SCHE), there are ways to bet directly on the bloc's success. That includes both the Guggenheim BRIC ETF (ARCA:EEB) and SPDR S&P BRIC 40 (ARCA:BIK). However, the easiest and best way could be through the iShares MSCI BRIC Index (ARCA:BKF). The fund tracks 318 different BRIC-based firms including leaders like Chinese PC leader Lenovo (OTCBB:LNVGY) and Indian generic drug superstar Dr. Reddy's Laboratories (NYSE:RDY). Overall, both China and Brazil make up about 70% of the fund's holdings, with India and then Russia rounding out the group. The fund charges 0.69% in expenses and yields 2.13%. Overall, the fund makes an ideal way to add extra BRIC exposure to a portfolio.
Investors may want to change the lowercase s in BRICs to an uppercase letter to represent South Africa. The four nations in the bloc decided to add Africa’s rising star to the group back in 2011. Yet, South Africa isn’t featured in any broad BRIC index as of yet. Featuring many of the same demographic trends and potential as the rest of the four countries, investors may want to add the iShares MSCI South Africa Index (ARCA:EZA).
Finally, as the BRIC matures, consumerism is playing a bigger role in their economic expansions. As such, funds like the Global X China Consumer ETF (ARCA:CHIQ) and EGShares India Consumer (ARCA:INCO) could see long term gains as the story plays out.
SEE: The Fab Five: South Africa Joins BRIC
The Bottom Line
When Jim O'Neil first came up with the acronym of BRIC, the four nations were the cream of the emerging market crop. A decade of fast growth later, the group has recently begun to stall. However, many of the same growth characteristics are in place and recent underperformance currently make the BRICs a bargain. For long-term investors, now could be the chance to add the four horsemen to a portfolio.
At the time of writing, Aaron Levitt did not own shares in any of the funds or companies mentioned in this article.