By dint of their sheer size and population, the BRICs (Brazil, Russia, India and China) have been touted as the economies destined to inherit the mantle of economic leadership from today’s developed economies. Together, the BRICs encompass more than 25% of the world’s land mass and 40% of the world’s population. The BRICs today already account for a combined GDP of $15.435 trillion dollars on a purchasing power basis. By that measure, they are already collectively larger than the United States.
But for all the talk about the rise of BRIC economies, the BRIC currencies are minnows in the world of global currency investment. Nevertheless, understanding a bit about the BRIC currencies can help you to make profitable investment decisions as these economies power ahead in the coming decades.
The Brazilian Real
The revaluation of the Brazilian real against the U.S. dollar over the past five years just may be the single-most underappreciated story in global financial markets. In 2009 alone, the returns that U.S. investors have enjoyed from Brazilian equities were boosted more than 40% due to the appreciation of the Brazilian real against the U.S. dollar.
The Brazilian economy is on fire. Over the past six months, the economy has grown at an annualized pace of more than 10%. The country has been chosen to host both the 2014 World Cup and the 2016 Olympics. New skyscrapers are going up along Avenida Faria Lima in the business district of São Paulo. With $20 billion in infrastructure projects and public transportation, and 53 transportation projects in the pipeline, Brazil has embarked upon an infrastructure spending spree that will change the shape of its economy forever.
The real has pulled back sharply over the last month with a recent correction in global emerging-market stocks. As a result, you would have been just as well off investing in the Brazilian real over the past 12 months as you have been in investing in Brazilian stocks.
But with Brazil’s economy enjoying an unprecedented boom, the real — through the WisdomTree Dreyfus Brazilian Real (BZF) — is my top pick among the BRIC currencies over the coming years.
The Russian Ruble
As the bad boy of emerging markets, Russia is the market that investors love to hate. Few markets have invited such consistent derision — yet made so much money — as Russia. Like the other BRIC currencies, the Russian ruble is a minnow. The Russian ruble is the 17th most-traded currency in the world in foreign exchange markets, and accounts for a mere 0.8% of global foreign exchange transactions.
Like the Canadian and Australian dollars, the fate of Russia’s currency is linked closely to the price of commodities. Its currency (and economy) will rise and fall with the price of oil. After a sharp fall during the Great Recession, the Russian ruble is once again on the rise.
Today, the Russian ruble trades at about 30.50 to the U.S. dollar. U.S. investment bank Goldman Sachs predicts that the ruble will strengthen to 28 to the dollar over the next three months, based on rising oil prices. Rising oil prices not only will increase Russian budget revenues but also will ease the resumption of capital inflows to Mother Russia. Assuming that the ruble strengthens, Goldman estimates that Russian GDP will grow by 5.8% in 2010 and 6.1% in 2011.
You can buy the Russian ruble through the CurrencyShares Russian Ruble Trust (XRU).
The Indian Rupee
Perhaps surprisingly, the Indian rupee was the top-performing global currency in the first quarter of 2010, rising more than 17% since the market’s lows on March 9, 2009. This robust performance reflects India’s strong economic growth, as it recovered from the “Great Recession.” A rebound in manufacturing and recovering farm output drove India’s Q1 economic growth to 8.6% — the best in two years — even as 7.4% growth for the financial year ended March beat government forecasts of 7.2%.
Thanks to its status as a net importer, India’s economy actually benefits from a rising currency. A strong rupee equals more purchasing power for the locals — though it means tougher times for India’s famous outsourcers. Since the market correction in early May, the Indian rupee has dropped sharply as worries about the eurozone’s banking system prompted investors to pull back from riskier assets. Foreign institutional investors have withdrawn nearly $2 billion from Indian stocks so far in May, reducing net inflows in 2010 to $4.6 billion.
Nevertheless, as the performance of the WisdomTree Dreyfus Indian Rupee (ICN) shows, the Indian rupee has been strong and steady over the past 12 months.
Chinese Yuan (Renminbi)
Since the summer of 2008, China has kept the yuan at 6.83 per dollar to shield its exporters from the global recession and a contraction in world trade. While the dollar has careened up and down against a basket of major global currencies, the Chinese yuan has traded in a very narrow range.
In the last month, however, pressure has grown on the yuan as investors begin to question the sustainability of the “China Miracle.” First, China reported a trade deficit of almost $8 billion in March, compared with a $24-billion surplus in October. That’s a huge change in six months. Second, there are signs that China’s real estate bubble is popping. A typical 1,000-square-foot apartment in Beijing now costs about 80 times the average annual income of the city’s residents, compared with historic levels of three or four times annual income. Property sales in Beijing, Shanghai and Shenzhen fell as much as 70% in May. Once China’s housing market collapses, China’s growth could slow or even decline. This also spells trouble for China’s liberally lending banks.
Finally, for all the talk of the Chinese yuan becoming the world’s reserve currency, the unpredictability of China’s political regime means that it will be many decades before the yuan becomes a serious contender to replace the U.S. dollar.