When building a portfolio, are BRICS still a buy?

A bumpy year for BRICS, but still a good investment; more than just a cute acronym

Associated Press

NEW YORK (AP) -- Down, down, down. That's the direction of stocks in the BRICS economies, which were investment darlings last year but now seem deadweights.

In stock market terms, it's been a disappointing year for the emerging-market powerhouses that make up the cute acronym: Brazil, Russia, India, China and South Africa. Almost all the major stock indexes are lower in the five countries. The market in the U.S., by contrast, is up 15 percent.

But BRICS, for a lot of reasons, are still a good buy to many investors, who think this year's declines are just a blip and not a long-term trend.

The economy is growing in every BRICS country. China expanded at a rate of nearly 8 percent last year, lower than previous years but enviable to most everyone else, including the U.S., which grew just a hair above 2 percent. Growth in the BRICS countries will continue to outstrip that of the developed world, and even that of overall emerging markets, for at least the next five years, according to the International Monetary Fund.

Indeed, what made emerging markets so attractive in the first place — namely, untapped potential — is still in ample supply in the BRICS. For most, their workforces are young and expanding; their poverty rates are falling; their life expectancy is growing. Together, they account for about 42 percent of the world's population. Their demographics are "way, way better" than the developed world's, says Derrick Irwin, portfolio manager at Wells Fargo Advantage Funds.

And as for the troubling declines in the BRICS stock markets this year? Not to worry, say Irwin and others. The stocks have room to grow.

Irwin says emerging-market countries, which include the BRICS, represent about 29 percent of the global economy but just 12 percent of global stock market value. That means the emerging-market stocks are "punching beneath their weight," he says, and "still maturing."

The U.S., on the other hand, is punching above its weight: It has 47 percent of the world's stock market value, but makes up less than 24 percent of the world economy, according to calculations using the MSCI All Country World Index.

Luiz Carvalho, managing partner at Tree Capital, thinks that concerns about the BRICS stock markets are overblown and are already accounted for in the lower stock prices. He believes they're set to grow.

The BRIC term was invented in 2001 by Jim O'Neill, the well-known former Goldman Sachs economist who retired last month He needed a shorthand way to refer to four big, developing countries that seemed poised to drive global growth. It was just BRIC back then, not BRICS, because O'Neill didn't include South Africa.

The acronym caught on and was embraced by the countries. Brazil, Russia, India and China held a BRIC summit in 2009. Two years later, they invited South Africa to join.

Investors caught on, too. From 2001 to 2007, the BRICS countries clocked better stock gains than the world's most industrialized countries. But the BRICS beat the developed countries only twice in the five years from 2008 through 2012, as measured by the MSCI BRIC index and the MSCI G7 index, which encompasses the seven most industrialized countries in the world.

For investors, it's important to remember that even if the BRICS are lumped together in hearts, minds and analyst reports, they still should be examined individually.

"Not all BRIC countries are created alike," says Anthony Chan, chief economist for Chase Private Client. For short-term prospects, he likes China best, with Brazil a distant second. He has concerns about South Africa.

Still, he's optimistic about all the BRICS. If they "pursue the right policy paths," he says, their growth rates will be "much more exciting than the developed markets'."

Here's a glance at each country.

—Brazil:

Declining demand for iron ore and other raw materials has hurt Brazil. The central bank has tried to stimulate the economy and met only limited success. Growth was less than 1 percent last year and roughly 3 percent in 2011, a disappointment after growth of nearly 8 percent in 2010.

Some analysts think a turnaround is near. The government has been trying to trim energy costs and strengthen investment in infrastructure, according to the World Bank. Much depends on China, which is Brazil's biggest trading partner.

Growth is expected to rise to 3 percent this year.

Stocks: The Brazil Bovespa is down 15 percent this year, after rising 7 percent last year.

—Russia:

Russia depends heavily on oil and gas exploration and production, so it has suffered as prices have flat lined. Labor strikes and a lack of business investment have derailed productivity. Its population, unlike in other BRICS, is shrinking.

Growth has been around 3 or 4 percent for the past three years, roughly in line with the world average but still below where it was before the financial crisis. Growth is expected to be about 3 percent this year, unchanged from 2012. The World Bank says the country needs to shrink the government's involvement in the economy, clamp down on corruption and map a plan for its aging population.

Stocks: The MSCI Russia index is down 13 percent this year, after rising 5 percent last year.

—India:

Growth dipped to 4 percent last year, which is slow by India standards. It's possible that the economy is just taking a breather after years of blistering growth, experts say. India's growth eased to 8 percent in 2011 from 11 percent in 2010.

Some investors see deeper problems, though. There are worries that the country, despite some recent changes, hasn't done enough to open itself to foreign investors. Others are waiting to see how elections fare next year, and wonder if a new government could stoke stability and tamp corruption. As more workers move from the countryside to the cities, it's vital that the country spend more on infrastructure like roads and the electric grid. India's economy is projected to grow 6 percent this year.

Stocks: The India SENSEX is flat this year, after rising 26 percent last year.

—China:

China has powered forward as it moves toward more of a market-based economy. It propped the world economy in the depths of the financial crisis, growing rapidly even when the economies of most other countries shrank.

In 2012, China's economy grew about 8 percent. That was down from the 9 and 10 percent range of the previous four years but still one of the fastest rates in the world. Chan, from Chase Private Client, thinks the slowdown reflects the country's efforts to shift from an export-based economy to one focused more on consumer spending. The government is pumping more money into social programs, which should also spur consumer spending. Growth is expected to be 8 percent this year.

Stocks: The Shanghai Composite Index is down 3 percent this year, after rising 3 percent last year.

—South Africa:

South Africa has successfully transformed itself from apartheid to a democracy with modern infrastructure. Growth, however, has been around just 2 or 3 percent for the past three years, less than the world average. It is expected to pick up slightly this year, to 2.8 percent from 2.5 percent.

The country is saddled with a devastating unemployment rate of 25 percent, and it's expected to get worse. The country was hurt by an electricity crisis in 2007, which was caused by aging power plants. Then the global financial crisis reduced demand for South Africa's raw materials, including gold, diamonds and platinum. This year, the mining industry has been plagued by violent strikes. High rates of HIV and AIDS are straining the health care system, and deep inequalities between the rich and poor are hindering growth, according to the World Bank.

Stocks: The MSCI South Africa index is down 5 percent this year, after rising 21 percent last year.

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