With the economies of the developed nations still mired in recession and the odds now favoring, at best, an uneven and anemic recovery, it's no wonder that many money managers continue to see brighter prospects for the fast growing so-called BRIC (Brazil, Russia, India and China) economies.
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BRIC Markets To Outperform?
In a recent quarterly survey of the world's top 150 equity market strategists, the BRIC markets were forecast to rise a further 17% this year on top of the 50% gains that they've racked up so far in 2009. That's more than twice the 8% gain expected for the S&P 500 index.
Strong Economic Growth Prospects
Such optimism appears well-grounded considering the enormous growth potential for the BRIC economies. Collectively accounting for just 15% of the $60 trillion global economy today, these economies could dwarf the output of the G7 economies in 20 years, according to Wall Street broker Goldman Sachs. With BRIC predicted to achieve economic superpower status, a compelling argument can be made to allocate at least a portion of one's portfolio to stocks tied to the growth of these economies. The basic economic principle of diversification alone justifies putting a few dollars into these emerging markets.
However, investors need to be mindful of another fundamental rule of investing before jumping into these markets: higher returns inevitably entail higher risks. While global markets all took it on the chin during the recent downturn, BRIC markets tumbled the most as over-eager investors had previously pushed these markets into bubble territory. There's no guarantee that this whole boom/bust whipsaw won't occur again.
But by narrowing one's investment focus to the largest and most stable BRIC stocks, one can minimize a decent amount of the risk inherent in these markets while still gaining the potential for above-average returns. Fortunately for U.S. investors, many of these larger BRIC names trade as American depository receipts (ADRs) and are listed on the New York Stock Exchange (NYSE). While priced in U.S. dollars, ADRs ultimately reflect the value of the underlying home country shares which are themselves traded in a foreign currency like Brazilian reals or Chinese yuan. Thus investors in ADRs take on a full measure of exchange rate risk, but, depending on one's view of the currency markets, such exposure could constitute an astute hedge against potential weakness in the U.S. dollar.
BRIC Stocks To Know
|Petroleo Brasileiro SA (NYSE: PBR)||93.8 billion|
|PetroChina (NYSE:PTR)||21.4 billion|
| CNOOC Ltd.
|China Mobile (NYSE:CHL)||188.9 billion|
|Vale SA (NYSE: VALE)||52.3 billion|
|Data as of market close July 13, 2009.|
Since energy will play a vital role in the future growth of these emerging economies it's no surprise that many of the larger BRIC companies are energy related.
In Brazil, the energy powerhouse is partially government-owned Petroleo Brasileiro SA or "Petrobras". Back in 2007, the company made global headlines when it announced the discovery of massive offshore oilfields that promised to put Brazil on the map as an energy superpower. But huge technical challenges still must be overcome before the country can tap into these huge multi-billion barrel reserves, as was revealed by a recent drilling disappointment. A drilling consortium including Petrobras, Exxon Mobil (NYSE:XOM) and Hess Corp. (NYSE:HES) failed to strike oil after spending $140 million on an initial well.
Looking for oil in the same region, the China National Petroleum Company, parent company of publicly traded PetroChina is expected to announce a bid later this month of up to $14.5 billion for a 75% stake in the Argentine unit of Spanish oil major Repsol (NYSE:REP). Rival Chinese oil company CNOOC Ltd. is also rumored to be a potential partner in the bid.
While investors continue to strain their eyes looking for signs of green shoots in the developing economies, some BRIC companies are making strategic moves now cash in on the expected explosive growth in their home economies. It looks like a smart move for them, and something that US investors might want to get a piece of. (To learn more, see Re-evaluating Emerging Markets.)
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