Few financial concepts have caught on as quickly as “BRICs”, which stands forBrazil, Russia, India and China, the “Big Four,” fast-growth economies in the world today. Goldman Sachs economist Jim O’Neill coined the phrase back in 2003, and it now has come into widespread use as a symbol of the shift in global economic power away from the developed G7 economies toward the developing world.
BRICs Building the World
By dint of their sheer size and population — and their collective decision to embrace their own particular brand of capitalism — BRICs are the economic future of the world. Together, the BRICs encompass more than 25% of the world’s land mass and 40% of the world’s population. And thanks to their predicted rapid growth by 2050, the BRICs could eclipse the joint economies of the current richest countries of the world. China and India will become the dominant global suppliers of manufactured goods and services. Brazil and Russia will be the world’s leading suppliers of commodities. 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.
Here’s what Goldman Sachs had to say in its original report “Dreaming with BRICS: The Path to 2050,” published in 2003.
* China’s economy will surpass Germany in the next few years, Japan by 2015, and the United States by 2041.
* India’s growth rate will be the highest — not China’s — and it will overtake Japan (today the world’s second-largest economy) by 2032.
* BRICs’ currencies could appreciate by 300% over the next 50 years, providing a big tailwind for investors in BRIC assets.
* Taken together, the BRICs could be larger than the United States and the developed economies of Europe within 40 years.
* By 2025, BRICs will bring another 200 million people with incomes above $15,000 into the world’s economy. That’s equal to the combined populations of Germany, France and the United Kingdom.
If anything, Goldman Sachs has become more bullish on the BRICs since it published its original report. The size of China’s economy overtook Germany’s economy in 2008, a year earlier than expected, and will overtake Japan in 2010. Goldman Sachs now believes that the Chinese economy will overtake the United States by 2027. And with India accounting for 10 of the 30 fastest-growing urban areas in the world and 700 million people moving to cities by 2050, its influence on the world economy will be bigger and quicker than implied in 2003.
BRICs on a Roll
The BRIC countries have stepped onto the world economic stage with a newfound confidence. Shanghai hosting the World’s Expo in 2010 highlights its aspiration to become a global financial center by 2020 — investing twice what rival Beijing did when hosting the 2008 Olympics. Brazil is about to embark on its own infrastructure boom as it is hosting both the World Cup in 2014 and the Olympics in 2016. Two of the world’s top five on the Forbes Rich list are from India. (Number one is from Mexico.) In 2010, Moscow has the second-highest number of billionaires in the world after New York City.
Here’s why you can expect the BRICs’ roll to continue.
First, for the first time in recent memory, BRICs are growing not by borrowing, but by investing. China has the world’s highest savings rate. Brazil and Russia are sitting on huge foreign currency reserves, thanks to windfalls from oil profits. Even freewheeling Brazil is showing heretofore unseen discipline by running a fiscal surplus.
Second, soaring commodity prices have put more money in BRICs’ pockets than ever before. That means much less danger of a financial meltdown like the ones Brazil and Russia had in the 1980s and 1990s.
Finally, higher credit ratings mean that BRICs today can issue debts in their own currencies. A decade after defaulting, Russia has a higher credit rating than the European Union economies of Greece and Portugal. The result? Much more stable economic expansion and financing of investment that both depend on the whims of foreign investors.
“Prediction Is Hard, Especially about the Future.” —Yogi Berra
Here’s a reality check: Despite their recent high profile, BRICs have to get a lot of things right to imitate the success of Japan, Germany and South Korea. Potential problems include China’s oppressive regime, India’s choking bureaucracy, Brazil’s history of policy flip-flops and Russia’s gangster capitalism.
So yes, the BRIC economies are collectively already about 15% bigger than the United States. But take away the economic affirmative action of purchasing power parity, and look at wealth in real terms, and the U.S. GDP ($14 trillion) is almost 40% larger than all four BRICs combined ($8.6 trillion). Using real GDP, the average American is almost 15 times richer than his or her BRIC counterpart. After all, there are 2.6 billion total citizens in the BRICs and only 308 million Americans. And in spite of the nation’s billionaires, more than 200 million Indians live on less than $2 a day.
And historical prediction is a mug’s game. The year 1900 had its own version of BRICs: Argentina, Russia, Austria-Hungary and the United States were the fastest-growing economies in the world. Investors were clamoring to buy Russian railroad bonds for the same reasons that they are investing in Chinese solar stocks today. What did the world look like in 1950? Two world wars and several revolutions later, Austria-Hungary and Russia didn’t even exist; Argentina went from economic bull to basket case, and the United States was a global superpower, responsible for 50% of the world’s economic output.
BRICs: Building Your Way to Profits
Cautionary tales notwithstanding, BRIC countries today offer some of the most exciting investment opportunities on the planet. You can make more money in one month investing in BRIC stocks than what you can grind out in the S&P over three years. Brazil’s stock market, the Bovespa, has gone from about 9,000 in September 2002 to over 70,000 in May 2008. Savvy investors in Russia made more than 60 times their money between the meltdown in September 1998 and the market’s peak in May 2007.
And today, it’s easier than ever to invest in BRICs. Among companies listed on the New York Stock Exchange, 34 are Brazilian, six are Russian, eight are Indian and 16 are Chinese. And that doesn’t include technology companies that are listed on the Nasdaq. There are a handful of BRIC exchange-traded funds (ETFs) as well.
The lesson? Investing in BRICs can offer you one of the most fascinating (and profitable) ways to invest over the coming decades.