When the history of the great emerging-market boom of the early 21st century is written, Goldman Sachs Group Inc. will merit more than a passing mention. Ever since Goldman economists Dominic Wilson and Roopa Purushothaman published Dreaming with BRICs: The Path to 2050 in October 2003, the composition of the emerging-market investing universe has changed dramatically.
Before that report, the Bric countries—Brazil, Russia, India and China—were important emerging markets, individually. Since the report, they have become the investing world’s equivalent of the Pussycat Dolls: a superstar band.
You can buy a Bric fund in Maribor, Slovenia or in Aabenraa, Denmark. Globally, there are scores of them. There are also several Bric indexes as well as passive, exchange-traded funds that seek to replicate the performance of these benchmarks. The big question is: What will investors dream about next?
Standard & Poor’s (S&P) has a Frontier Index, which tracks smaller markets such as Bangladesh and Ivory Coast. It has gained 35% annually over the past five years.
That’s an impressive run.
Yet, it is doubtful if another grouping of countries will be able to replace the appeal of the Brics for some time to come.
Goldman’s own attempt to create a B list, which it termed “The Next Eleven” and included Egypt, Indonesia, Vietnam and Pakistan, hasn’t quite caught the fancy of the fund- management community since it was published in December 2005.
In the pre-Bric days, the Big Four emerging markets were South Korea, Taiwan, South Africa and Mexico. Together they made up, as of December 2002, 55% of Standard & Poor’s S&P/IFCI index. The Goldman report replaced this hegemony of “richer” nations—South Korea and Taiwan had per capita incomes of about $12,000 (Rs5.04 lakh) in 2002—with paupers that would one day be princes.
“Suddenly retail investors en masse woke up to the Bric concept,” S&P analysts Alka Banerjee and Siddharth Panjwani in New York wrote in a report this month. “A slew of Bric mutual funds were launched for both retail and institutional investors to tap into this explosion of demand.”
The Bric nations now command two-fifths of the S&P/IFCI index, starting from less than a quarter in 2002. They have played their cards well.
China used the surge in investor interest to sell shares in its biggest banks. Since June 2005, six mainland lenders have raised a combined $51 billion through initial public offerings. In January 2006, Russia lifted the cap on foreign ownership of OAO Gazprom, the world’s biggest natural-gas producer, “making available in one swoop $100 billion in emerging-market equity to investors,” S&P’s Banerjee and Panjwani say. So what next after Bric?
“Although some may stick with a Bric-only strategy, other emerging markets merit the attention of serious investors,” the S&P analysts say. Some other investors may be tempted to narrow the field further to “Chindia,” a term coined by Indian economist Jairam Ramesh in his 2005 book Making Sense of Chindia about China and India. There are now 18 mutual-fund plans with Chindia in their names. Most of them are Korean.
China and India are undoubtedly two of the world’s fastest growing major economies; as investment destinations, they complement a plan.
Yet, a Chindia strategy may be overly restrictive. A Bric-only approach may also be too narrow.
Keeping Bric at the core, a periphery of new emerging-market options is beginning to take shape. South Africa, which had a bigger index weighting than any Bric nation in 2002, is now the “S” of an expanded “Brics”. J.P. Morgan Fleming Asset Management in Japan began offering a “Brics Five” investment trust in December 2005.
A Spanish fund-of-funds was started last year dedicated to investing in the “Brict” nations. The “T” stands for Turkey. Include Eastern Europe, too, and the acronym becomes “Bricet.”
One day, it may all converge in a big “Bric+,” which is the name a Finnish asset-management company chose in May 2006 when it rebranded its emerging-market fund. Beyond a point, you have to question if the Bric-centred labelling is adding any real value. The portfolio diversification benefit from investing in faraway places has shrunk in recent years, S&P’s research shows, as the correlation between US and emerging-market returns has increased.
Tellingly, Purushothaman quit Goldman Sachs in New York last year to join the Mumbai-based Future Group, which runs a retailing business in India. If you want to profit from rapid economic expansion, you may have no choice but to live it. Buying stocks in fast-growing countries doesn’t always compensate for the extra risk, as US financial theorist and author William Bernstein will tell you.
“Yes, there is a relationship between economic growth and equity returns,” Bernstein wrote on his website last year, “but unfortunately, it has the wrong sign.”
So, are investors in Slovenia and Denmark better off investing in US stocks? We’ll see—in 2050.