When Goldman Sachs (NYSE:GS) economist Jim O'Neil first dubbed the four nations of Brazil, Russia, India and China the BRICs 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. The MSCI BRIC index has risen by more than eight times what the S&P 500 index returned during the past decade, and the BRICs' combined gross domestic product soared to $13.3 trillion last year. However, while the group's previous prowess is well known, lately it has begun to struggle. For long-term investors, now could be the best time to strike on BRIC.
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Short-Term Pain, Long-Term Gains
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. So far, the BRIC bloc has lived up to that promise. That is until recently, when potential cracks began to form.
Slowing growth stemming from Europe is having its way with the four emerging superstars. As major commodities producers, both Russia and Brazil have seen their fortunes fade as energy and minerals prices have dropped. Rising budget deficits in India, along with a falling rupee has wreaked havoc on the Indian stock market. Finally, efforts to cool inflation in China may have been too much and now policy makers in Beijing are doing all they can to avert a hard landing scenario. So, it's no wonder why investors have pulled more than $6.3 billion and $5.8 billion out of Brazilian and Russian stocks and bonds, respectively, last month. Overall, the MSCI BRIC index has lost 19.7% during the past year.
However, much of the long-term growth story of the four nations continues to remain intact, and the recent downturn has made them quite attractive. According to MSCI (NYSE:MSCI), the BRICs currently can be had for an average P/E of 8.9 with a hefty dividend yield of 3.6%. That compares to 13.8 times earnings and a 2.3% dividend yield for the U.S.-based S&P 500. That could even be a bigger bargain as the nations resume their long-term growth trajectories.
SEE: Potholes In The Golden BRIC Road
Betting on the BRIC
While the four nations make the bulk of broad-based emerging market funds like the Vanguard MSCI Emerging Markets ETF (ARCA:VWO), there are ways to bet directly on the bloc's success. The easiest way is through the iShares MSCI BRIC Index (ARCA:BKF). The fund tracks 318 different BRIC-based firms including leaders like Brazil's Itau Unibanco Holding S.A. (NYSE:ITUB) and China's CNOOC (NYSE:CEO). 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 0.67% in expenses and yields 2.33%. The Guggenheim BRIC ETF (ARCA:EEB) makes an ideal broad BRIC play as well.
Small-caps are often a great way to play a nation's "domestic" economy. After all, a multinational commodities giant like Vale (NYSE:VALE) sells its products all over the world. Surprisingly, there are no broad BRIC small-cap funds, but all of the nations do have individual funds that track them. Both the EGShares India Small Cap (ARCA:SCIN) and iShares MSCI China Small Cap Index (ARCA:ECNS) offer exposure to the BRICs with the largest consumer markets.
Finally, oil and natural gas producing Saudi Arabia and Russia have been hit hard by falling energy prices. However, long-term energy demand and rising crude oil and natural gas prices bode well for the energy giant. With holdings in key Russian producers like Gazprom (OTC:OGZPY) and Rosneft, the Market Vectors Russia ETF (ARCA:RSX) offers a way to play both rising energy prices and the Russian markets return. The exchange-traded fund charges 0.62% in expenses and features a 42% weighting to energy firms.
SEE: Understanding BRIC Investments
The Bottom Line
When Goldman Sachs first came up with the acronym of BRIC, the four nations were the cream of the emerging market crop. A decade of torrid growth later, the group has recently begun to stall. However, many of the same characteristics are still in place and the BRICs currently represent a value. For long-term investors, now could be the chance to add the nations to a portfolio. The previous picks, along with the SPDR S&P BRIC 40 (ARCA:BIK), make ideal ways to do just that.
At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.