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OCTOBER 2010
BRICs Remain Attractive
The BRIC markets (Brazil, Russia, India and China) continue to march higher as their
economic recovery remains robust. In addition to the strong reported macro-economic data,
financial and fiscal indicators also remain positive. As a result of the continuing growth in
BRIC economies, we have seen a huge influx of funds into the BRIC stock markets. In the
five-year period ended September 2010, portfolio inflows into BRIC markets totalled
US$104 billion.1
Dr. Mark Mobius
Executive Chairman,
Templeton Emerging Markets
Group
These four markets represent a very economically diverse group, accounting for about 40%
of the world’s population and 30% of the global land area. These markets offer a number of
important advantages and there are very good reasons why we believe investors should
adopt a positive long-term view. Most important, while global growth has slowed, BRIC
markets are still expected to grow at a much faster rate than developed markets. In 2010,
BRIC markets are forecast to grow at an average of 7.9%, nearly triple the 2.7% growth
estimated for developed markets.2
Although the slowdown in the global economy had an impact on BRIC markets, these
economies are becoming more domestically driven. Government expenditure in areas such
as infrastructure as well as private domestic consumption has been, at least partially,
offsetting the decline in growth resulting from weaker exports. The services sector has also
been gaining in importance, especially in China and India.
CONSUMERS
Another important factor contributing to the growth in BRIC markets is the consumer. We
have been stressing the importance of emerging market consumers since there are so
many more of them than in developed markets. As mentioned above, BRIC markets
account for about 40% of the world’s population. With economic growth accelerating and
population growth decelerating, per capita income is on the rise. With rising per capita
income and strong demand for consumer and other goods, the earnings growth outlook for
consumer-oriented stocks remains positive.
COMMODITIES
In addition to consumers, another interesting investment theme is commodities. In general,
we expect commodity prices to continue their upward trend over the long-term because of
continued demand from emerging markets and a relatively inelastic supply. Infrastructure
development in emerging markets has also led to continued demand for hard commodities,
such as metals. Demand for and prices of soft commodities such as sugar, selective grains
and cocoa has also increased.
Looking at the stability and safety of BRIC markets, it is important to note the accumulation
of foreign exchange reserves that puts these economies in a much stronger position to
weather external shocks than they were about ten years ago. Foreign reserves, for
example, in China are the largest in the world, totalling more than US$2.6 trillion. Russia
has more than US$400 billion, while India and Brazil have more than US$200 billion.
BRAZIL
Focusing on the individual markets, Brazil is the largest investable market in Latin America.
It is a strong commodity producer and exporter and is likely to benefit from rising global
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demand, including demand from China, for energy, metals and other commodities. It is also a country with a large and growing
consumer base. Brazil’s economy is diversified and largely domestically driven, as exports account for less than a quarter of Gross
Domestic Product (GDP). Moreover, Brazil will be hosting the World Cup in 2014 and the Olympics in 2016, so it is expected to
invest significantly in infrastructure that should help drive economic growth in the coming years, as well as improve the basis for
stronger sustainable growth in the long-term.
RUSSIA
In general, our long-term outlook for Russia is positive. The country has the world’s third-largest foreign exchange reserves.
Moreover, Russia owns a large proportion of the world’s natural resources and many of the country’s commodity companies are
among the world’s low-cost producers. It is also interesting to note that based on current valuations, the Russian market is among
the cheapest in the emerging market universe.
INDIA
India’s economy is also expected to continue to record sustained economic growth in the future. The country is a good example of
where entrepreneurship has taken hold of the economy and the private sector is thriving despite the government bureaucracy and
poor infrastructure. The market in India also benefits from a strong tradition of saving and India, compared to China, has a lower
dependence on exports to the US as a percentage of its GDP, which may help to partially insulate it from a possible US economic
slowdown. The country is also one of the most popular locations for outsourcing by developed markets.
CHINA
China is one of the fastest growing economies in the world and continues to display strong financial and economic fundamentals.
The country recorded strong GDP growth in the second quarter of 2010 and toppled Japan as the world’s second largest economy
after the US, solidifying the country’s growing political and economic importance. With a consumer base of 1.3 billion people,
consumerism thus has been flourishing in China. Rising per capita income and strong demand for consumer goods and services
means the earnings growth outlook for these stocks is positive. Foreign direct investment continues to grow as international investors
remain attracted to China's booming economy.
Most important for value investors, the current valuations of BRIC markets remain more attractive than developed markets. As at 31
October 2010, the MSCI BRIC Index had a P/E of 14 times, cheaper than the MSCI World Index which was trading at a P/E of 16
times. Of the four markets, Russia is down to single-digit P/Es, making it especially appealing.
There will be corrections along the way, but over the long-term, we expect BRICs to outperform, reflecting the economic growth in
those countries.
Emerging market investments can be volatile and investors should be prepared to hold an investment for the long-term.
FOOTNOTES
1. Source: EPFR Global
2. Source: International Monetary Fund, World Economic Outlook, October 2010
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