BRIC strategy is hot again

BRIC markets might recover faster than developed markets.

Want to rebuild your stock portfolio? Start with a BRIC strategy. As promoted by Goldman Sachs Group Inc. in 2001, this approach focuses on Brazil, Russia, India and China. While their stock markets were as battered as those in North America and Europe in 2008, most of them may recover faster and offer sustained growth.

Only the Russian economy raises some questions. Dogged by loan problems, joblessness and low oil prices, Russia’s economy will contract this year and is the weakest in the BRIC family. China, India and Brazil are a different story. It is impossible to ignore the population growth and human capital in these developing nations, which don’t have a fraction of the weaknesses that the Western banking system has. Another reason for renewed faith in the BRIC strategy – or rather “BIC” (excluding Russia) – is the eventual economic decoupling of China from the US.

Fewer debt woes

China, India and Brazil aren’t suffering as much from the crippling leverage problems of the US and Europe. The three countries are unlikely candidates for large American-style borrowing to fix banking and housing markets.

People’s Bank of China Governor Zhou Xiaochuan last week suggested that the dollar shouldn’t be the world’s reserve currency anymore. While the country’s economic growth has slowed from 13 percent in 2007, it is being buoyed by the government’s $585 billion stimulus plan.

Chinese growth

The Chinese economy, the third-largest in the world, is likely to grow almost 8 percent in 2009. In contrast, Japan’s, South Korea’s and Taiwan’s may shrink this year. China’s stock market, though, doesn’t reflect the country’s relative financial strength. Unlike the US, which is largely borrowing from China and other nations to finance its stimulus program and other government spending, China is bolstering its economy from a huge cash pool. Its foreign-exchange reserves alone amount to almost $2 trillion. Also projected to grow are Brazil and India. Brazil grew 5 percent last year and the resource-rich country will benefit from trade with a growing China. India, which is getting a boost from a $31 billion government stimulus, will also see improved domestic demand.

BRIC rebounds

Some of the strongest rebounds in world equity markets have taken place on the BRIC stock exchanges this year. By the end of last week, Brazil’s Bovespa had risen more than 11 percent, Russia’s Micex Index had added 31 percent, India’s BSE Sensex 30 had climbed about 4 percent, and China’s Shanghai SE Composite Index had gained more than 30 percent in 2009.

Invest long-term in a broadly diversified international index or an exchange-traded fund such as the Vanguard Total World Stock Fund, or the iShares S&P Global 100 Index Fund.

The author is a Bloomberg News columnist. The opinions expressed are his own