Emerging markets may be “high-risk, high-octane stuff”, says Justin Modray of Bestinvest in The Independent on Sunday, but those who have been brave enough to invest in funds covering Brazil, Russia, India and China (Bric funds) have seen “eye-popping” returns, says Craig Karmin in The Wall Street Journal.
In the five months since launch, the Templeton Bric fund has returned 10.6% for investors, while the Axa Talents Brick (the ‘k’ stands for South Korea) has risen by a third over the past 12 months.
That compares to a measly 0.7% return over the same period from the global emerging markets sector. “Even the star managers in this sector couldn’t keep up with the Brics,” says Tim Sharp in The Independent on Sunday.
Bric funds: from export to internal consumption
One of the bedrocks of the expansion in emerging markets has been exports. Russia and Brazil have benefited from the price of oil and other commodities being pushed up by China’s and India’s demand for raw materials, while Westerners have snapped up China’s cheap manufactured goods. Many commentators fear, understandably, that this makes them vulnerable to a slowdown, or even recession, in the US economy – something that seems more and more likely to materialise in the year ahead.
But there’s more to the Bric story than cheap goods. As their economies have developed, the countries have become increasingly self-reliant. The emergence of a middle class in each country is feeding a steady rise in internal consumption. With retail and financial services booming as a result, there are signs that the Brics are now better placed than in the past to weather a US downturn.
And investment bank Goldman Sachs (whose head of global economic research, Jim O’Neill, initially coined the term Bric) certainly sees no slackening of growth in the near future – the US bank has pencilled in average GDP growth of 8.5% for the Brics during both 2007 and 2008. Indeed, O’Neill believes the Brics could “become bigger than the G6 by 2035”. He thinks China represents particularly good value and that this year’s stockmarket rally “could be the start of a bull market” lasting five years or more, says the FT.
Bric funds: risks and rewards
Of course, there are risks in investing in emerging markets. Political interference, corruption and bureaucracy are a fact of life in all four countries. But there is comfort in the fact that valuations remain attractive. “Brazil is on nine times 2007 earnings and China and Russia on 11-12 times,” Julian Mayo, investment director of Charlemagne Capital, tells the FT.
For those who are interested in buying into the Bric, most financial advisers reckon emerging markets should make up no more than 10% of a portfolio. The Axa Talents Brick is the fund with the biggest exposure to China, at around 39%.