Emerging markets across the globe have been on a roll for the first part of the 21st century. With an average growth rate of 6.5% from 2006 to 2011, they have outpaced their mature-economy counterparts, which grew at an average rate of 1.1%, according to the Conference Board.
In particular, Brazil, Russia, India and China — collectively referred to as the BRICs — have vastly outperformed their developed world counterparts. Average growth for the BRICs peaked in 2007 at 9.7%, but slowed to about 6% in 2011, according to the International Monetary Fund.
While these four emerging markets — not to mention any others — should be considered only as part of an overall diversified portfolio rather than as individual investments, here is a look at the state of each economy, including long- and short-term growth potential and risks.
Brazil: The Safest Bet
Compared to the emerging markets of Russia, India and China, Brazil may bring the fewest risks. Politically, its democratic government ranks as the least corrupt of the BRICs on Transparency International’s 2011 Corruption Perceptions Index. Economically, the country relies on commodities exports — generally agricultural products such as beef, coffee and ethanol. The prices for agricultural commodities are less vulnerable to fluctuation than oil or copper, both of which are key exports for fellow South American countries Chile and Peru.
Factory output stalled in late 2011, partly as a result of weak European demand. In response, Brazil’s central bank cut interest rates, which prompted some analysts to worry about inflation. Instead, the cuts kept Brazil’s economy on track. “It turned out to be a prescient move,” says Victoria Marklew, a Northern Trust country risk manager.
Smart, decisive central banks as well as pro-business governments are assets to developing economies. The Brazilian government recognizes the value of international investment but realizes that its influence in rural areas, where the country’s agricultural exports are produced, is spotty, Marklew says.
Brazil’s infrastructure spending will spike during the next few years, as the country prepares to host both the 2014 World Cup and 2016 Summer Olympics. Marklew expects the exposure to enhance Brazil’s international profile and draw attention to the country’s strong long-term prospects.
“Imperfect and messy as it is, Brazil is a full-fledged democracy. Long term, we view democracies as much better at managing shifting expectations than command economies,” says Marklew. She forecasts real gross domestic product (GDP) growth for Brazil at 3% for 2012 and regards the country’s outlook as generally positive.
Russia: A Future Tied to Oil
Russia, like Brazil, is heavily reliant on commodities exports. But instead of soybeans and beef, Russia’s leading export is oil, which can fetch extraordinary prices but is subject to the moves of a volatile market.
“Russia’s future right now is tied to the price of oil,” says Ieisha Montgomery, an associate international economist in Northern Trust’s Country Risk Group. Although that’s been a boon lately as prices spiked, “it’s been a gift and a curse because it makes policy-makers lazy.”
Indeed, Kremlin politicians have tabled a critical privatization and modernization initiative that could have improved and diversified Russia’s economy by equipping businesses within a range of industries to better compete internationally. The initiative also would have resulted in fundamental and much-needed upgrades to the country’s transportation infrastructure. Montgomery speculates that high oil prices, coupled with Vladimir Putin’s recent election as Russia’s president, likely will mean there won’t be sufficient political will inside the Kremlin to push forward with the privatization and modernization programs.
Russia lags behind Brazil, India and China in economic growth. Montgomery forecasts that its GDP will grow at 4% or less throughout the decade.
Russia also ranks most corrupt among BRIC nations on the 2011 Corruption Perceptions Index. With a score of 2.4 on a scale of 10 (higher scores mean less corruption), it wins the title by a fairly wide margin: India scored 3.1; China, 3.6; and Brazil, 3.8. For reference, the United States scored a 7.1.
It can be difficult for multinational corporations to do business in Russia because of the political alliances required, and even when they succeed in building the proper connections, the landscape can change quickly to reverse a foreign company’s fortunes.
Despite that risk, Montgomery thinks multinational retailers who do business in Russia may fare well. For example, the emerging Russian upper class has shown a strong appetite for luxury goods, and pizza chains are popular in Russian cities.
India: Brighter Prospects Than China
India’s growth and profile have lagged behind China’s, but its long-term prospects may be brighter. That’s because India won’t need to navigate as many political and cultural obstacles to become a fully developed economy, thanks to its democratic government, relatively speedy adoption of a western-style legal system and a functioning free press, says Northern Trust’s Jim Pressler, a country risk manager who covers both India and China.
He also notes that India’s commitment to building infrastructure — and using foreign investment and involvement to do so — will facilitate the country’s growth. That includes building roads and waterworks, and laying cable.
“There are big headlines to be had in India,” Pressler says. “We see them as outperforming China over the long term.”
For now, India’s growth is still a step behind its eastern neighbor. Pressler forecasts India’s 2012 GDP growth at 6.2%, down from 7.2% last year. But India remains less vulnerable to economic instability in Europe than China.
China: Slowing but Steady
China’s economy continues to slow after growing rapidly throughout the past decade. Part of China’s current uncertainty can be traced to Europe because a large portion of China’s upscale manufactured goods are sold there; if demand lessens in Europe, China’s economy could suffer.
Additionally, the European economic slowdown could hurt the amount of infrastructure spending in China. As debt levels rise in Europe, investors there have consolidated their investments. This has created a troublesome capital outflow in China and given the country its own debt issues.
However, China’s government should be able to help its economy steer clear of a hard landing by taking appropriate fiscal and monetary policy actions, says Jim McDonald, chief investment strategist for Northern Trust.
Like India, China also has been investing heavily in infrastructure projects, but Pressler worries the spending has created an asset bubble that resembles the U.S. housing market before its collapse.
While Pressler expects China to fare more than a full point better than India at 7.5% GDP growth, that is down from the 9% to 10% growth China has registered in recent years.
In addition, although India ranks worse than China on the 2011 Corruption Perceptions Index, Pressler sees the waste and bribery that are common in India as less threatening than the situation in China. “There is everything but a formalized state understanding that Chinese laws will work to benefit state security,” he says. “If there is a conflict between an international investor and a state interest, the law is only a guideline and the chances are good that any decision will favor the state.”
BRICs: Potential Profits and Risks
Brazil, Russia, India and China — among other emerging markets — all embody potential profits for investors. But they also bear greater risks than developed economies because “they come with a degree of ambiguity. This is not the West; these are environments where there can be a lot of flexibility in policy and legal interpretation,” Pressler says.
Nonetheless, while these emerging markets and others individually seem brimming with potential, the true opportunity lies when emerging-market investments are considered as part of an overall diversified portfolio.
“Individual country risk can outweigh the return potential,” McDonald says. “For example, despite China’s superior growth over the past several years, its stock market has been laggard. So investors who concentrated there instead of broad emerging markets suffered.”
