The B.R.I.C.S. — Brazil, Russia, India, China and South Africa. Most international investors recognize this 13-year-old acronym. Goldman Sachs executive Jim O’Neill coined the ‘BRICS’ term in 2001 in a piece he titled Building Better Global BRICS. He argued: “World policymaking forums should be re-organized and in particular, the G7 should be adjusted to incorporate BRIC representatives”. Consult Table 1.
Current facts: The world’s economy has $76.8 trillion in heft. BRICS leads with a combined GDP of $17.8 trillion. U.S. GDP has $17.5 trillion. Euro Area GDP counts $13.4 trillion. That implies BRICS economies make up 22.7% of the world. When Jim O’Neill wrote his paper in 2001, he got to a 23.4% weight. The BRICS haven’t become a bigger world GDP influence, like Jim O’Neill suggested. In fact, they are a bit less important.
In 2014, Brazil hosted the group’s 6th summit. After the World Cup, the group signed documents to create the US$100 billion BRICS Development Bank; a reserve currency pool worth over another US$100 billion; documents laying out cooperation between BRICS export credit agencies; and an agreement for cooperation on innovation.
China – Want the most salient fact? — China dominates the BRICS. Its economy is $10.9 of the BRICS’ $17.8 trillion total (61%). What’s the biggest risk? Attractive Chinese shares ran up big time in last year’s rally. That opened up opportunities for shorts. There is a small industry selling fraud reports to hedge funds on Chinese companies. Trying to cash in by selling an overpriced IPO has been standard stuff in China.
India – India has a new Prime Minister, Narendra Modi. He and the University of Chicago-trained economist running the Indian Central Bank, Raghuram Rajan, are shaking things up. Political change was sorely needed. The Association for Democratic Reforms says: “more than a third of the Indian parliament faces criminal charges.”
These new leaders have proposed direct transfers into new bank accounts for the poor. More than 2/3rds of India’s people eat less than the minimum target set by this government. Targeting better food for India is one place to look for a great investment in India. Another prime place to look into share investment is electricity. As India’s GDP grew over the last decade, power demand vastly outstripped power supply. Blackouts are common. More than 300 million Indian people lack access to electricity.
Russia – With a fraction of the population, Russian piles up a $2.1 trillion GDP mountain, comparable to India at $2.2 trillion and Brazil at $2.2 trillion. Russia does this by exporting oil and natural gas to Europe. As you know, Ukraine unrest boiled over and hurt European relations. A shunned Russia signed agreements to ship oil and natural gas to China along new routes. It’s an infrastructure play to think harder about. Tit-for-tat sanctions make it scary for outside share investors. But sanctions also opened up cheap share valuations. What’s par for the course? Jim O’Neill didn’t elaborate on how serious political corruption is here either.
Brazil – I read a Brazilian report from the Council on Hemispheric Affairs. It stated: “The country has swayed in a limbo between periods of economic growth and stagnation for decades”.
When I looked to the Heritage Foundation’s Index of Economic Freedom for Brazil, I found a quote that says it all. “Heavy government intervention in the economy continues to cause the misallocation of capital, limit mobility, and fuel a sense of injustice.” Indeed. In 2013, Brazil ranked 116 out of 189 in terms of the World Bank’s ease of doing business.
What is attractive in Brazil these days? I would look hard at the Brazilian food industry for shareholding. Brazil’s managers can get ahead profitably by introducing the latest technology and outside operating skills into a land with enormous food production.
South Africa – South Africa’s unemployment hovers around 25%. What’s the problem? Here is what the Heritage Foundation’s Index of Economic Freedom had to say: “South Africa achieved its highest economic freedom score in 2003 and has failed to show further progress. Its transition to a more open economic system, helped by a relatively competitive trade regime, has been undermined by the failure of structural reforms to diversify the economic base.”
The Heritage Foundation elaborated further: “Enforcement of anti-corruption statues is inadequate. Public servants do not declare their business interests as required by law. The ruling ANC allegedly charges fees for access to top government officials. The public procurement process is often politically driven and opaque, and the delivery of government services is undermined by poor administration”. ‘Nuff said there. BRICS suffer in common the plague of corruption.
What’s there for South African share investors? I would look at platinum and palladium ETFs.
Conclusion: How to Play the BRICS?
In each BRICS country, gems hide. That’s investing everywhere. Ferret winners out. Understand how the future gets brighter in simple company-specific terms. The Zacks Rank can do that for you, as it does for me. Effective politicians can deliver on market reforms. These serve as a major stock market catalyst once they hit. India showed us that already.
John Blank, Ph.D., a noted global economist, is Zacks’ Chief Equity Strategist. He leads an exclusive investor group to the world’s most exciting investment opportunities with his International Trader portfolio.