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January 10th (Wall Street Journal) - In a decade, BRIC has been transformed from a marketing term to an investment craze to a political bloc.
Around 2001, Goldman Sachs created the acronym for Brazil, Russia, India and China, nations with rapidly growing economic output.
Investors rushed. Shares soared. Packaged products followed. In December 2005, a BRIC index was launched, which allowed for the creation of cheap, passive investment funds. Over five years, the index has returned 20% a year, versus zero for the MSCI World Index.
There's little reason to doubt the growth potential of the BRIC countries. Collectively, they contain 40% of the world's population and provide 15% of its economic output. Investors should, nonetheless, view the group cautiously at the moment, for at least four reasons.
Economic growth and stock returns are not the same. How closely the two match depends in part on the supply of shares. China's economy dwarfs those of its BRIC brethren by size, but Brazil dominates most BRIC indexes, in part because it has plenty of tradable shares.
Popularity has a steep price. Shares in the U.S. look expensive, at about 20 times 2009 earnings, with only a 2% dividend yield. But BRIC countries shares are closer to 25 times earnings, with a dividend yield of less than 1%. It used to be that investors in emerging-markets shares demanded deep discounts to offset political and institutional risk. Now, they pay a rich premium.
BRIC countries carry risks. China keeps its currency artificially cheap and, in doing so, risks inflation. Russia depends heavily on energy exports. India has bloated government, ethnic conflicts, hostile neighbors and controls on foreign investment. Brazil has a soaring currency -- a tribute to its accomplishments, but also a threat to exports.
