Are the BRICs hitting a wall?

Will Hodges ignores the hype and takes a careful look at prospects for the key emerging market economies

Will Hodges ignores the hype, and takes a careful look at prospects for the key emerging market economies.

Ever since Goldman Sachs coined the term "BRICs" as a shorthand for the world's fastest developing economies - Brazil, Russia, India and China, the words "emerging markets" have been synonymous with expectations of high growth. While ten, or even five, years ago emerging market stocks or bonds would have been considered high risk by most fund managers, they have steadily become a staple element of investment portfolios. With Brazil and China no longer the unfathomable economic labyrinths they once were, even the most cautious of pension funds now expect to have exposure to the BRICs, leaving the risktakers to venture further afield in search of the next untapped market. Behind the strategies of most investors is the notion that emerging markets offer promising long-term prospects in contrast to, say, the UK where the outlook for business, not to mention the wider economy, looks uncertain at best. Those who think this way point to the fact that emerging markets boast larger populations, bigger resource bases and stronger export industries than their Western counterparts.

Looking at the recent trajectory of the global economy, it's hard to dispute the theory. According to the International Monetary Fund, the average gross domestic product (GDP) growth of emerging market states over the past ten years has been about 6 per cent a year, compared with the 2 per cent growth enjoyed by developed states. This rate of growth has seen so-called developing states mount an ever stronger challenge to the global economic order. At the top of the pecking order is China, which over the past three years has overtaken both Germany and Japan to become the world's second largest economy.

However, to view emerging markets as a haven in an otherwise tumultuous economic landscape is to ignore the challenges that countries like India and China face over the next few years. HSBC, a major player in the world of emerging market finance, is among those expecting to witness a faltering in emerging market growth, particularly in the short-term. A spokesperson at the company said: "Our latest data from emerging markets points to a slowdown in the rate of recovery and the likelihood of some bumps in the road ahead", and blamed the stalling economies of India and China for the bank's weaker than expected financial performance at the end of 2010.

China

GDP growth forecast for 2011: 9.6%

China's growth over the past two decades has been primarily driven by its exports - it can capitalise on low labour and manufacturing costs to ship cheap consumer goods to the US and Europe. This once symbiotic relationship with the West is slowly beginning to unravel, however, with Chinese workers demanding higher wages as living standards rise. In addition, the US and other Western states are putting pressure on China's leaders to revalue its currency which they believe is being artificially weakened by the government.

Another obstacle China must overcome is its growing dependence on fossil fuels.While China is currently the world's second largest consumer of crude oil after the US, in terms of average use per consumer it ranks some way behind our fuel-guzzling American cousins and indeed much of the developed world. As Chinese living standards rise, however, so too will demand for cars, air travel and air-conditioning - and the thousands of other energy-intensive industries which result from increased wealth. For China to continue to develop at the rate it wants, it must be able to secure a steady supply of oil, coal, and minerals from overseas. Investments in Africa and other resource-rich states is the strategy currently favoured by Beijing.

India

GDP growth forecast for 2011: 8.4%

India has traditionally found itself in China's shadow as an investment opportunity with Western investors dissuaded by corruption, poor governance, extreme poverty and other problems. In the past few years, it has begun to shrug off this image as the country's growing middle class has helped to position the country as one of the world's most attractive consumer markets.

However, for all its recent progress the country remains plagued by problems. Despite huge investments in infrastructure in recent years, much of the country remains deprived of basic services with poverty and unemployment levels in the countryside a stark contrast to the growing wealth of the urban middle class - and the widening gap between rich and poor presents an increasing risk of social unrest. Furthermore, India's huge population (1.2 billion and rising) means that goods such as food and fuel are forever in short supply with the familiar foe of high inflation a recurring problem. With few natural resources to boast of, energy production is a particular concern for India, and much of its coal and oil supply has to be imported from overseas. Energy shortages are increasingly commonplace, affecting manufacturing output.

India

GDP growth forecast for 2011: 8.4%

India has traditionally found itself in China's shadow as an investment opportunity with Western investors dissuaded by corruption, poor governance, extreme poverty and other problems. In the past few years, it has begun to shrug off this image as the country's growing middle class has helped to position the country as one of the world's most attractive consumer markets.

However, for all its recent progress the country remains plagued by problems. Despite huge investments in infrastructure in recent years, much of the country remains deprived of basic services with poverty and unemployment levels in the countryside a stark contrast to the growing wealth of the urban middle class - and the widening gap between rich and poor presents an increasing risk of social unrest. Furthermore, India's huge population (1.2 billion and rising) means that goods such as food and fuel are forever in short supply with the familiar foe of high inflation a recurring problem. With few natural resources to boast of, energy production is a particular concern for India, and much of its coal and oil supply has to be imported from overseas. Energy shortages are increasingly commonplace, affecting manufacturing output.

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