BRICS: The Next Frontier for Investors

Abstract

The global economic crisis of 2008 brought home to the global investors the stark truth that they need to look beyond the Western economies for generating returns on capital invested. The fact that the BRICS or the emerging markets of Brazil, Russia, India, China, and South Africa weathered the economic downturn and were able to grow at more than 5% annually meant that the growth starved Western economies paled in comparison.

Moreover, because of the sagging of demand in the west and the buildup of debt, consumers in the western economies started to spend less and save more, which along with the fact that the BRICS were busy rolling out the red carpet to global capital were reasons enough for global investors to look beyond traditional markets.

Apart from that, the BRICS were also ramping up their infrastructure, which created a demand for investment, and the burgeoning middle class in these countries meant that a completely new consumer class was emerging leading to some experts calling it the Trillion Dollar Prize so named for the potential market opportunities.

This report evaluates the attractiveness of the emerging markets to western investors and assesses the challenges of doing business in those countries. The key themes in this report are that despite the many challenges inherent to the emerging markets, they represent a valuable investing opportunity.

Introduction: The Trillion Dollar Prize

The BRICS or the grouping of nations of Brazil, Russia, India, China, and South Africa so named by the Goldman Sachs analyst Jim O’Neill represent the next frontier in global economic growth. The fact that they have managed to post double-digit growth rates for most part of the earlier decade and even in the midst of the global economic crisis, they have averaged 5-6% growth means that they are serious contenders for the western economic dominance. Indeed, O’Neill estimates that in the next two decades, the BRICS would soon be in a position to challenge the West and especially China is poised to overtake the US.

Further, what makes the BRICS attractive is the Trillion Dollar Prize or the prospects for the emerging consumer class and their buying power for western multinationals trying to grow in an age of death of demand and an age of oversupply. The BRCIS have the demand and not the supply, which means that western companies in search of investments can look towards them for the “double whammy” combination of satiating the demand and smoothening the supply.

Apart from these, as this report details in the succeeding sections, the youthful nature of the population, the English fluency and the huge labor force that can work for half or lesser the wages of their western counterparts means that they represent a golden opportunity for western companies.

Finally, what makes the BRICS so alluring is that they are raring to go when compared to the west that has seem to be caught in its own identity crisis over multiculturalism, immigration, and confronting a debilitating economic downturn coupled with the “shock of gray” or the ageing of most of its productive workforce. Considering the relative advantages of the BRICS and the disadvantages of the west, this report recommends the BRICS as a serious contender for the next frontier for global investors.

Opportunities in Emerging Markets

As discussed in the previous section, the BRICS are emerging as a force to reckon with in the global economy and the fact that they have posted consistently high rates of economic growth make them attractive to global investors. Moreover, the biggest advantage that they have is the “demographic dividend” which means that the proportion of youth as a percentage of the total population is quite high which means that the BRICS have the potential to absorb as much investment as the investors can send it their way.

Further, the BRICS are building world-class infrastructure (especially China) and though as we shall discuss later, India lags behind on this count, the other emerging markets are certainly in the race to build the infrastructure for the future. Russia already has good infrastructure though in recent years, some of it has atrophied because of neglect. However, the recent hosting of the Sochi Winter Olympics successfully has meant that it received the necessary boost in terms of economic growth.

Apart from this, the BRICS have another advantage and that is related to their ability to weather the economic downturn because their economies are not yet saturated meaning that they have the potential to grow further, faster, and stronger.

In addition, the BRICS and especially India have the advantage of knowledge of western business processes which means that they can convert their economies into information based economies as India has already done and Russia and China are catching up in this regard. South Africa is also emerging as a serious competitor for the knowledge based economic paradigm and considering that it along with India has a population proficient in English and has world-class infrastructure means that it can emerge from the shadows to pose a contention for future growth.

Finally, as mentioned in the introduction, the BRCIS are consuming resources and finished goods at a pace that can be described as frenetic which means that western marketers of goods made by multinationals have the mouthwatering prospects of finding large and relatively untapped markets for their goods.

Challenges in Emerging Markets

The previous sections have discussed the opportunities and the captivating customer base in the emerging markets. This has tended to obscure some of the challenges that global investors face when they do business with the BRICS.

For instance, China has not yet adopted globally accepted norms of arbitration and dispute resolution, which means that western companies who want to sue their partners for breach of contract face an uphill task in getting justice. Moreover, many experts believe that China’s banking system is too opaque, the statistics related to production, and consumption has to be taken with a pinch of salt.

As for India, the high levels of corruption make it extremely difficult for investors looking for speedier clearances and quicker approvals of their projects. Apart from these bottlenecks, infrastructure in India is yet to reach levels of comfort and though we are not talking about western standards of roads, ports, airports, and connectivity, in some cases the hinterland is too cut off for meaningful business ventures. The political logjam and the policy paralysis that has set in over the last two years bring with them additional challenges.

Russia and Brazil seem to be chugging along nicely except when one touches upon the political instability and the rise of mass movements protesting the elites and their takeover of the countries. Indeed, in recent months, the political climate in these countries has taken a turn for the worse because of widespread protests which when coupled with the incidence of corruption pose formidable challenges.

Finally, South Africa is good to go on many fronts though there is widespread resentment among the people about the failure of racial integration in the context of post apartheid forms of governance. The common complaint is that the end of apartheid has benefited tiny elite at the expense of the majority.

Conclusion: The Road Ahead

This report has detailed the exciting opportunities as well as the pitfalls inherent in the emerging markets. In recent months, the BRICS and especially India has been hit with currency crises and China, the powerhouse, is staring at a credit crisis. Coupled with the Tapering of the QE or the Quantitative Easing program of the United States Federal Reserve, it seems as though the days of easy money that was partly responsible for the “exuberance” in the emerging markets is over. However, it is too soon to write off the BRICS as their macroeconomic fundamentals are strong and despite the setbacks, it is evident that they would soon bounce back.

To take the case of India, the upcoming elections are being keenly watched by investors because of the perception that a vote for stability and change would usher in speedier decision-making, reduction of delays in granting approvals, and the unfreezing of the policy paralysis that has been the case for the last couple of years.

As for China, despite the recent instances of corporate defaults and credit crises, the government is serious about maintaining its growth rate and the key point to be noted is that the West is too heavily invested in China to rock the boat.

Russia is a different ballgame altogether as it has the resources so coveted by global corporations and coupled with the emerging oligarchs who want a stable and prosperous Russia, the country remains a safe bet though its recent actions in Ukraine have resulted in some apprehension about its intentions with respect to the West.

In conclusion, while the road ahead might be bumpy for investors in the BRICS looking for returns, one can say with some confidence that the destination is in sight and the prospects for double digit growth returning to the BRICS is a distinct possibility.