The First Decade of BRIC Investment

It has been 10 years since Jim O’Neill of Goldman Sachs coined the acronym BRIC to describe Brazil, Russia, India and China and it seems to be an appropriate time to take stock. All the four economies have grown beyond the expectations of many people but there are a number of weaknesses and areas of concern. In addition, there are a number of structural issues with all four countries.

Generally, most investors feel that the biggest disappointment has been India on such key factors as productivity, and the implementation of reform measures and the encouragement of foreign direct investment. Political uncertainty seems to have stalled the reform process and just a few days ago, after announcing landmark reforms of the retailing business, the government was forced to stall the reforms. The implementation of the reforms would have led to billions of dollars in fresh investment in areas such as supermarkets and the upgrading of the cold chain supply infrastructure. The latter is particularly disappointing because experts estimate that anything in the region of 30% of agricultural produce is wasted because of inadequate cold storage infrastructure.

As it is, India’s performance in attracting foreign direct investment has been far from satisfactory and statistics from the United Nations show that in the first half of the year 2011, India was only able to garner under $20 billion compared to $23 billion for Brazil, $33 billion for Russia and over $60 billion for China. This fiasco with retail reform is bound to take its toll with many foreign investors now being convinced that the government is not serious about reform. As it is, the country is plagued with a high rate of inflation, worsening current account deficits and shrinking inflows of capital. The last thing that is needed at this juncture is a problem with balance of payments.

The problem with Brazil is that the currency seems to be highly overvalued and booming energy exports contribute to the strong currency which could be detrimental to the manufacturing sector [this phenomenon is known as Dutch Disease]. As for China, it appears that the dizzying pace of growth in the past is slowing down and their foreign exchange reserves are showing some signs of shrinkage. A number of studies now show there is no relationship between the invest in brics currency  returns on investment and the growth rate of an economy. In fact you just have to look at China to grasp this point. From 1993 onwards, the nominal growth rate of the economy has been just under 16% but the average return from the stock market on a compounded basis for the same period has been -3%.

There is no doubt that these four economies will continue to grow at a much faster pace than we developed countries but the lessons of the past decade show that investment will continue to be tricky and comparatively high risk. However, it is still attractive to invest in the BRIC countries if you are selective about your investment. It is best for the average retail investor to stay invested in a to obtain the benefit of risk diversification and the protection of a pool of assets.

 

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