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.