New York: For all the concern about stock market bubbles in Brazil, Russia, India, China (Bric), the biggest emerging markets may still have more promise than anything in the developed world.

Fourth place: Traders at the Hong Kong Stock Exchange. In China, the market value of freely traded shares is $643 billion, according to Morgan Stanley. That’s 20% of the country’s $3.25 trillion economy and the smallest percentage among Bric markets.

The simple math of comparing the value of companies with their countries’ combined gross domestic product (GDP) shows the so-called Bric markets total $1.71 trillion (about Rs67.2 trillion), or 25% of GDP.

US equities available for trading, by contrast, are worth $13.98 trillion, or about the same as comparable GDP, according to data compiled by Morgan Stanley and Bloomberg. Stocks in all industrialized nations account for 81% of GDP.

That helps explain why Brics are “in the early stages of the rally", said Jeffrey Kleintop, who helps oversee $163 billion as chief market strategist at LPL Financial Services in Boston, and is adding to his “overweight" in developing nation stocks by selling shares in industrialized countries. “You’re seeing a lot of areas run up, but it’s not gotten to the point where it is representative of the overall economy."

While history shows emerging markets have the greatest potential for growth, they are also susceptible to some of the biggest declines. The Mexican peso devaluation in December 1994 led to a 24% drop in developing nations’ stocks, while Thailand’s decision to let the value of its currency fall on 2 July 1997 spurred a 37% loss in six months. Emerging market shares fell another 19% after Russia defaulted on $40 billion of debt on 17 August 1998.

Irrational exuberance

Even as the Morgan Stanley Capital International (MSCI) Emerging Markets Index has surged more than fivefold from a decade low in September 2001, it has tumbled by more than 10% in a matter of weeks on at least five separate occasions.

China’s CSI 300 Index has climbed 168% this year, while Brazilian, Russian and Indian indexes have all risen to records, prompting warnings stocks may be too expensive.

“It’s easy to be carried away in the stock market when things are going very well," Berkshire Hathaway Inc. chairman Warren Buffett said on 24 October at a press conference in Dalian, China. “We at Berkshire never buy stocks when we see prices soaring."

When Alan Greenspan was asked at a conference of insurance executives in Boston on 30 October if China was in a state of “irrational exuberance", a phrase the former Federal Reserve chairman made famous in 1996 when speaking about the US stock market, he said, “I think so."

“When you don’t expect it, it breaks," Greenspan said.

Even with the gains, Bric markets are small compared with the size of their economies. The four countries account for 14% of global GDP, while their stocks make up 5.1% of the world’s market value, based on shares available for trading, data compiled by Morgan Stanley show.

Chinese market

In China, where most foreign investors are limited to owning shares of mainland stocks listed in Hong Kong, the market value of freely traded shares is $643 billion, according to Morgan Stanley. That’s 20% of the country’s $3.25 trillion economy and the smallest percentage among Bric markets, after a 10-fold increase in market value over the past four years.

Brazil’s Bovespa index’s 44% jump this year—the biggest advance since 2003—has boosted the country’s market capitalization to 35% of GDP, the highest among Bric nations. That’s still less than half the average for developed nations, whose combined stock market value of $29.8 trillion compares with economies that total $36.9 trillion, according to Morgan Stanley and Bloomberg data.

Earnings growth

Earnings at Chinese companies traded in Hong Kong, known as H shares and red chips, will increase by 33.8% this year, according to Morgan Stanley. Brazil will post an increase of 30.8% in profits, Indian firms will grow 29.3% and Russia 17.2%, according to the New York-based bank.

“These markets have a long way to go," said John Praveen, chief investment strategist at Prudential International Investments Advisers Llc. in Newark, New Jersey, a unit of Prudential Financial Inc., which oversees $648 billion. He has an “overweight" position in emerging markets and said he would buy during any sell-off.

The Brics acronym was coined in November 2001 by Jim O’Neill, the New York-based chief economist at Goldman Sachs Group, Inc. He said Brazil, Russia, India and China would join the US and Japan as the biggest economies in the world by 2050, eclipsing most of today’s developed nations.

In the six years since, Russia’s Micex index has climbed the most, surging 781%. The Sensex in India jumped 508% and Brazil’s Bovespa rose 395%. The MSCI China Index, which includes shares that aren’t governed by ownership restrictions on mainland stocks, has jumped 501%.

By comparison, developed nations’ stock markets outside the US doubled and the Standard & Poor’s 500 Index, the benchmark for American equities, gained 32%.

Benchmarks in Bric markets all reached records last week, while US stocks reeled from bank writedowns on credit losses. The S&P 500 dropped 1.7%, falling for the second week in two months. Russia’s Micex added 1.3%, Sensex climbed 3.8%and reached 20,000, Bovespa finished the week with a 0.4% loss, and the MSCI China index advanced 0.3%.

Japan’s stock market expansion from 1977 to 1987 shows the potential for Bric countries. The nation’s market capitalization was 53.6 trillion yen ($467 billion) in 1977, representing 29% of the economy, in line with the average since 1955, according to data compiled by Japan’s Cabinet Office and the Tokyo Stock Exchange. During the next 10 years, that percentage jumped to 99% as the Nikkei 225 Stock Average increased more than fourfold.

Be committed

The stock market peaked at the end of 1989 and then lost half its value during the next decade as its asset-bubble burst.

“You want to be overweighted before the market drives those market capitalizations up," Alan Brown, who oversees $276 billion as head ofinvestments at Schroders Plc., said in New York. “You want to be committed to emerging markets."

China, India and Russia together accounted for half of global economic growth over the past year and will help compensate for a US slowdown in 2008, according to the International Monetary Fund in Washington.

“Ultimately, there seems to be plenty of capital in the world for companies that are growing," said William Fries, who helps oversee $53 billion at Thornburg Investment Management, Inc. in Santa Fe, New Mexico. He has 21% of his fund in emerging market stocks and has been buying shares of Chinese companies, which he declined to name.

Record IPOs

That outlook is spurring demand for a record number of share sales from Bric markets this year. Initial public offerings (IPO) and additional stock sales in the four countries have totalled $186 billion in 2007.

For China, India and Brazil, the amounts sold to the public so far this year already exceed every year on record since at least 1999, Bloomberg data show. In Russia, the $27 billion in stock offerings is the biggest since at least 1996, according to Moscow-based UralSib Financial Corp.

Brazilian companies raised a record $30.6 billion this year, more than the value of share sales in the previous six years combined, Bloomberg data show. Bovespa Holding SA, owner of the Sao Paulo exchange, raised 6.63 billion real (Rs14,619 crore) in an IPO on 25 October, the world’s fifth-biggest initial sale this year, and climbed 51% on its first day of trading. Ltd, operator of China’s largest trading website for firms, last month raised $1.5 billion in the biggest IPO of an Internet company after Google Inc.’s in 2004. Investors sought more than 180 times the Hong Kong-listed shares on offer of Hangzhou, China-based Alibaba.

“A lot of investors are jumping on the growth train," said Hayes Miller, who helps manage $48 billion at Baring Asset Management Inc. in Boston. The firm bought Sao Paulo-based Bovespa’s shares during the IPO.

Greenspan’s warning gives LPL’s Kleintop reason to be optimistic. After the former Fed chairman made his original comment on irrational exuberance, US stocks climbed for three more years. The Nasdaq Composite Index almost quadrupled before peaking in March 2000.

“Maybe we are just now at the irrational exuberance point for emerging markets," Kleintop said. “I think the bubble will build for a year or two, or even three, before it turns bad."

Daniel Hauck and Van Tsui in New York, Bei Hu in Hong Kong and Kotaro Tsunetomi in Tokyo contributed to this story.