It started with a Goldman Sachs paper that popularized the term BRIC, referring to the emerging markets of Brazil, Russia, India and China. The paper projected that by 2040 the combined BRIC economies will be larger than the developed economies of the US, Japan, UK, Germany, France and Italy. BRICs would have remained nothing more than a catchy concept but the subsequent eye-popping stock market returns in these countries led to a predictable result: the fund industry is churning out products to ride the trend and investors seem to be chasing returns. Over the past five years, Brazil, Russia, China and India have returned 52*, 30%, 22%, 35% respectively (in US dollar terms) compared to 7% for the S&P 500.
A frequent justification for investing in BRICs is the rapid GDP growth experienced by these economies. However, in this article, William Bernstein advises caution in inferring stock market returns from economic growth pointing out that if anything, there seems to be negative relationship between growth and returns. Bernstein also notes the paucity of data on risk / return characteristics of emerging markets in general, never mind the BRIC markets.
Another reason for caution is the sorry history of foreign investing “concepts” — Japan in the eighties and the Asian Tigers in the nineties. Is there any reason to believe that this time will be different?
BRICs do have a role in a portfolio — as a part of a broad emerging market holding such as the Vanguard Emerging Market ETF (VWO). But there is no reason to believe that an allocation higher than their 5.4% weighting in the world stock market is warranted.
* Using iShares MSCI Brazil ETF (EWZ), Templeton Russia & East Europe Fund (TRF), China Fund (CHN) and India Fund (IFN) as a proxy for the Brazil, Russia, China and India markets respectively.
