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Four Countries You Must Own


Once in a great while a trend takes hold that's so powerful, it transforms the entire global economy: the Industrial Revolution of the 18th century, the modern industrial nation in the 19th century, and the emergence of cheap computing and communications in the 20th century.

The newest megatrend? It's the rise of the BRICs. That's shorthand for four dynamic developing nations with large populations -- Brazil, Russia, India, and China. The four now account for less than 15% of the economies of the G6 nations. But collectively they could be larger than the G6 in just four decades, say economists at Goldman, Sachs & Co. (GS). That depends, of course, on whether they get the fundamentals right: sound fiscal and monetary policies, free trade with the outside world, and massive investment in education. "It's a story for the future," says Robert Hall, portfolio manager for global emerging markets at Russell Investment Group.

That means you might want to start making investments now. You can choose individual equities or take a basket-of-stocks approach with exchange-traded indexed funds or actively managed mutual and closed-end funds. Don't invest a huge lump sum at once. Instead, put your money in over time. The markets are volatile, and there will be pullbacks offering cheaper entry points.

These economies have weaknesses, too. For instance, foreign capital is pouring into China so quickly that some economists fear the combination of a speculative frenzy and a backward banking system will eventually burst the bubble. Watchdog group Transparency International ranks India among the rampantly corrupt nations in its latest Corruption Perception Index. And investors are questioning Russian President Vladimir Putin's commitment to capitalism after the recent crackdown on oil giant Yukos. Any one of those could derail the markets or the economy for a bit.

Still, there is precedent for making a long-term bet on an emerging frontier. In the years after the Civil War, America's industrial output lagged far behind that of Germany, France, and Britain. Yet from 1870 to 1914, America's economy expanded fivefold, and the U.S. became the world's leading industrial power. Along the way there were about a dozen sharp downturns and a handful of financial panics, yet stocks returned an average of 6.5% a year after inflation. "If you can close your eyes for years, you'll probably do well," says Stuart Schweitzer, global markets strategist at JPMorgan Fleming Asset Management in New York.

In part driven by the economic performance of the BRICs, the entire emerging-market sector put on a stellar show this year. The Morgan Stanley Capital International Emerging Market Index is up some 14% through Dec. 10, vs. 6.8% for the Standard & Poor's 500-stock index.

And 2005 looks good, too. Emerging-market stocks are cheap, with valuations about 40% lower than in the U.S. The sinking dollar is prompting investors to send more money abroad, says Brad Durham, a managing director at Emerging Portfolio Fund Research in Boston. Currently, global mutual funds and pension funds are underweighted in the BRICs. As investors become more familiar with the BRICs, says Durham, more money will flow to them.

One strong global theme that benefits the BRICs in particular is demand for industrial commodities. Brazil's Bovespa stock index is up some 15% this year, powered by companies such as Companhia Vale do Rio Doce, a major exporter of iron ore, and CSN, a major steelmaker. Rio Doce, CSN, and other basic industry companies should continue to do well considering the world's voracious appetite for raw materials, especially in China. Russia's Gazprom, for instance, will account for a quarter of world gas production, and it will be one of the international oil giants after buying a chunk of rival Yukos. "It's Russia's Aramco," says James Fenkner, chief strategist for Troika Dialog, a Moscow investment bank, referring to the Saudi Arabian oil company. "You don't need to be born into the House of Saud to benefit from Gazprom."

While commodities are expected to remain strong, many global investors believe rising incomes and growing employment in the BRICs will make consumer companies golden. In a decade, say the Goldman economists, the BRICs' middle class will total more than 800 million, greater than the populations of the U.S., Western Europe, and Japan combined today. The BRICs' middle class now number more than 250 million, says Goldman, and those consumers are already spurring demand for cars, cell phones, and better food, furnishings, and clothes.

Investing in the consumer sectors of these countries has been hard because of a scarcity of good, publicly traded companies. But that's changing. New opportunities are opening in Brazil, for example, after a rash of initial public offerings there. Among the IPOs were Natura, a cosmetics company, and Grendene, a footwear maker. In Russia, mobile-phone companies such as Mobile Telesystems are benefiting from growing usage. When Putin came into office in 2000 there were some 1.5 million cell-phone subscribers in Russia. Now there are more than 50 million. India's Pantaloon Retail is building both food hypermarkets and clothing stores that appeal to young buyers. Same-store sales are expanding at a 12% to 15% annual pace.

FOOLHARDY -- OR FARSIGHTED?

In China, consumers are also inveterate savers, salting away some 40% of their incomes. That's good for financial-services firms such as China Life Insurance (LFC), a favorite of Agnes Dang, an investment manager for Standard Life Investments in Hong Kong. China Life is the country's biggest insurer, and its premium income is growing at 15% a year. Phillip Ehrmann of Gartmore China Opportunities Fund, a U.S. mutual fund, expects a number of state-run Chinese banks to go public in 2005, and they may make attractive investments. You heard that right. China's banks have a reputation for bad loans and poor management, yet Ehrmann thinks some of them will clean up their acts because the government wants them to go public.

For sure, those who invest in those Chinese banks -- or in the BRICs -- will be called foolhardy by some doubters. But much the same was said in the 19th century about those who invested in a wild and raucous nation called America.

By Christopher Farrell with Frederik Balfour in Hong Kong, Jason Bush in Moscow, and Jonathan Wheatley in São Paulo


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