WHEN the idea of a Bric fund – an equity fund focused on Brazil, Russia, India and China – first took off in the mid-noughties, they were all the rage with investors. Goldman Sachs predicted 2050 would be the year when the Brics became the world's leading economies, and today they are heading resolutely in that direction. But after a period of extraordinary highs and lows for Bric funds, are these products still attractive to investors?
Few would question the growing might of the Bric economies. China is the fastest growing major economy in the world – overtaking Japan as the world's second largest this week – Russia is the biggest energy exporter, India has the second largest workforce, and Brazil is a commodities giant.
Over the last decade they have grown up from countries with massive potential to ones who are starting to dominate the world stage. This youthful exuberance has already proved popular with international investors, fuelling a boom in valuations that saw prices nearly double across the Bric stock markets between October 2006 and October 2007.
But it was short lived, as panic during the financial crisis caused a run that, overall, Bric shares have yet to fully recover from – despite a 96 per cent surge in 2009. While their rise in the world economic order seems assured, Bric stock markets have been an unpredictable rollercoaster for investors who face significant challenges as their respective economies come of age. “In the short run their challenges could become a problem if not managed properly,” said Brian Coulton, global emerging markets strategist for Legal & General. “But over a five year horizon I still believe they will grow very rapidly.”
The difficulty for investors is to know whether Bric stock markets will continue to grow as fast as their economic output. Their potential is now well understood, accepted and priced into stocks by most analysts, even though valuations have not recovered to their 2007 peak. Yet given their current problems, markets remain extremely jittery, meaning that investors must accept high volatility without necessarily the growth potential offered by younger, less well-researched emerging markets.
In comparison, experts point to Turkey, Indonesia and Colombia as some of the most exciting prospects. “Global emerging markets funds can go much broader, going into any market they want to,” said Danny Cox, head of advice at Hargreaves Lansdown. “You get flexible asset allocation with an expert making all the calls.”
HSBC Global Asset Management, which launched the first Bric fund in 2005, caters for all tastes, and investment director Alex Tarver believes the Bric versus global emerging markets (GEM) debate is simply a question of whether investors want diversification or focus. “GEM is more diverse and has recently underperformed Bric,” he says.
But he says Russia, one of the least exciting recent Bric stories, is now his favourite, with a fast growing middle class and attractive stock valuations compared to the rest of the Brics. Brazilian exporters are under pressure as its government wages currency wars against China and America. China is in good shape but cannot keep the yuan under lock and key indefinitely. And India is finding it increasingly difficult to maintain its growth rate.
Investors considering Bric funds anew have missed the heady early years of the mid-2000s – and the bull market recovery of 2009 – and to financial advisers Brics now seem out of season. Exposure to more dynamic, emerging markets is making global funds more popular. But going with the trend is rarely a ticket for success in investing, and the Brics remain the undisputed powerhouses of the future. As their stock markets mature, they are sure to attract increasing flows of foreign and local money, making an investment in a Bric fund still a sensible long-term asset allocation decision; just be prepared for some severe mood swings.