Emerging markets have been of enormous interest to investors in recent years, and none have created a greater stir than a group of countries collectively labeled BRIC (Brazil, Russia, India, and China).

Why all the fuss?

The recent interest is all about the numbers. Investors have looked at development in BRIC countries, population statistics, and the global economy, and many have concluded that the long-term potential in BRIC is the next great worldwide growth story.

As a result, indexes that attempt to reflect BRIC performance have soared in the last several years. The Dow Jones BRIC 50, which includes the largest and most liquid securities of each country, rose by more than 300% between December 31, 2002, and mid-2006 (source: Dow Jones).

Several factors are driving the newfound attention to BRIC investments:

Globalization and growth--Worldwide demand for energy and other commodities, the outsourcing phenomenon, and widespread access to global capital have helped fuel the BRIC countries' growth. India dominates service outsourcing, Brazil and Russia have vast energy and mineral resources, and China has developed into the world's manufacturing plant. India's economy is growing at 8.5% a year, and China's at more than 10.5%, compared to 3.1% U.S. growth (source: 2006 CIA World Factbook).

Huge populations, future buyers-- Together, the BRIC countries represent 42% of the world's population, again according to the CIA World Factbook. That number represents enormous untapped future purchasing power. It gives BRIC countries the potential for even more rapid expansion if their economies continue to develop and the benefits reach a greater percentage of their populations.

Reduced reliance on foreign debt-- Growth has helped BRIC countries pay down loans incurred during previous economic crises, though the potential for default on that debt could still present an investment risk.

Riding the roller coaster

Despite the recent success of these regions--or because of it--money managers are divided on how long the rise of emerging markets can continue without a significant correction. Because commodities are so important to the BRIC economies, any slowdown in worldwide growth and therefore demand could have a significant impact on investments there. Other risks exist as well. All four countries have experienced political instability, currency fluctuations, and/or economic problems. Investors who were affected won't soon forget Russia's 1998 economic crisis or Brazil's bouts with rampant inflation in the late 1980s and early 1990s.

Also, economic growth rates don't necessarily translate directly into stock market returns; until the last year or so, China's stock market suffered serious multiyear losses.

BRIC investing and beyond

You have many ways to take advantage of the projected growth in these regions. One of the most popular is index mutual funds or exchange-traded funds (ETFs), which may be based on an index for an individual country or one that's BRIC-wide. You might also want to explore beyond the BRICs. Other emerging markets might have great growth potential but might not yet have attracted as much investor attention. Diversified emerging-markets funds often have a large exposure to the BRIC countries. The number of BRIC-specific companies is relatively limited; including other emerging markets as well as the BRICs gives a fund manager an expanded universe of securities from which to select.

If you're interested in individual stocks, some of the largest BRIC firms are listed on U.S. exchanges via American Depositary Receipts (ADRs).

The historical volatility of emerging markets means you should take a long-term view, and be prepared for the possibility of ups and downs along the way. We at Stage 2 Planning can help with deciding whether this asset class should be part of your portfolio. Like all investment advice we give, diversification is the breakfast of champions. We will discuss how the BRIC's can be integrated in your portfolio in an appropriate manner.

Diversification does not guarantee against loss. It is a method used to help manage investment risk.

With warm regards,

Stage 2 Planning Partners

Josh Patrick © 2007

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