Feeling adventurous? Invest in the 'BRICs'
A surging demand for everything from natural resources to designer labels within the emerging powerhouse economies of Brazil, Russia, India and China, the so- called ‘BRICs', presents a potentially rewarding opportunity but intrepid investors will need to hold their nerve.
The BRIC acronym was coined by former Goldman Sachs director Jim O'Neill in 2001 after he forecast the four nations would surpass the likes of the US and Japan in the economic stakes over the coming years.
It is not hard to see why he touted the collective, given they represent the largest of the global emerging markets, nations whose economies and markets are still on the up and are enjoying continuous and rapid growth, unlike the sluggish progress witnessed in mature markets such as the UK and US.
The region houses 40% of the world's population, a wealth of natural reserves and, as they prosper, it is predicted consumer spending will boom, boosting markets to deliver potentially high but volatile investment returns.
Those who got in early have reaped substantial rewards. Over the past decade, the combined BRICs have seen market growth of a massive 466%, while the UK's FTSE 100 delivered just 139%. However, Mick Gilligan, head of research at broker Killik & Co, warns that the BRICs are not a one-way bet. He says: “The BRIC markets have the potential to offer substantial rewards but investors must bear in mind they are also very volatile.”
While the BRICs, and emerging markets generally, display attractive traits that investors look for, such as strong economic growth, they also suffer from corruption, political instability and volatile stockmarkets. The 10-year returns are super but the three-year figures are less so, with the BRICs rising just 2%. But the volatility has not dissuaded UK investors, who ploughed nearly £2 billion into global emerging markets funds over the past year.
China, which has already overtaken Japan to be the world's second-largest economy, hit the headlines recently following a slowdown in its economic growth, causing some investor concern. But emerging market investment veteran Mark Mobius of fund manager Franklin Templeton is confident emerging economies, driven by the BRIC countries, are set to enjoy further progress for many more years.
The biggest economy in South America is on a spending spree, putting billions into shopping malls, roads and railways, in preparation for hosting the World Cup next year and the Olympics in 2016.
Inflation and low growth are a concern in the short term and its stockmarket is dominated by a couple of heavyweights; mining company Vale and energy giant Petrobras, so investor returns can be heavily influenced by the fortunes of just a few organisations.
But, over the long term, experts believe there is great potential, as it is home to an abundance of natural resources and a young, burgeoning middle class.
One of the world's leading oil, coal and natural gas producers, Russia is highly dependent on energy prices. As long as they remain strong, so should its economy. It also enjoys a compelling domestic consumption story, where its retail boom is believed to be still in its infancy but historically it has been beleaguered with corporate corruption issues.
The government says it is cracking down on the problem, but investors are still nervous and the market, as a result, looks very cheap. But for those willing to take a long-term punt and endure considerable volatility, there could be generous returns.
With more than 1.2 billion inhabitants, consumer spending is the great hope that will drive economic growth and investor returns. The nation has become a major exporter of information technology services. It has a strong entrepreneurial culture and there is a lot of opportunity to develop the infrastructure.
Its main challenge is its bureaucratic political system, but the government says it is taking steps to cut red tape. The stockmarket looks the most expensive of the BRICs and may not represent the best value for new investors right now.
China's economic growth may have slowed but great potential remains over the long term. The world's second-largest economy and largest exporter, continues to enjoy a flourishing domestic consumption story, where the rising middle classes retain a healthy appetite for luxury brands such as Armani, Prada and Apple.
The Chinese have flocked in their millions to the nation's cities, spurring massive spending on infrastructure. It has a growing network of highways and is expected to have 40,000km of high-speed rail tracks by 2015. China's stockmarket valuations remain pretty cheap and look attractive for a country growing at such a rate.
Where to invest?
While there are BRIC funds available to investors, such as the Allianz BRIC Stars portfolio, experts believe right now the best way to access these markets is via a wider global emerging markets fund, which typically invest in most, if not all, of the BRIC markets.
Global emerging markets funds, while still volatile, do have the added benefit in that they reduce risk, as they are more diversified and can access other developing countries which will benefit from BRIC growth. Gilligan tips the Lazard Emerging Markets fund, up 24% over the past three years, which has investments across Africa, as well as Asia and Latin America.
He also rates the JPMorgan Emerging Markets fund, up 18%, over the term and the Templeton Emerging Markets and Genesis Emerging Markets investment trusts, up 26% and 27% respectively. Adrian Lowcock, senior investment adviser at Hargreaves Lansdown, cites the Newton Emerging Income Fund, which has already achieved a 19% return since its launch last October.
It has investments in Brazil and China, but not in Russia or India. Lowcock also likes First State Global Emerging Market Leaders, but potential investors better move quick, as it has hinted it may close to new money. Over three years, it has achieved a 52% return – but 99% over five years. There are funds which give individual access to BRIC markets, but investors need to tread conservatively as they are taking a single country bet.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An acronym, which stands for Brazil, Russia, India and China; countries all deemed to be at a similar stage of advanced economic development. The term was coined in 2001 in a report written by Goldman Sachs director Jim O’Neill who speculated that, by 2050, these four economies would be wealthier than most of the current major G7 economic powers.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.