The new mil­len­ni­um brought with it a tec­ton­ic shift in the bal­ance of glob­al eco­nom­ic pow­er, as the world wit­nessed the rise of the BRIC na­tions: Brazil, Rus­sia, In­dia and Chi­na. When the BRIC acronym was coined in 2001 by Gold­man Sachs, there was much hope that the group­ing would take the lead in glob­al growth over the next 50 years. To­day, most of the pos­i­tive mo­men­tum be­hind the world econ­o­my is be­ing dri­ven by these four coun­tries. How­ev­er, in re­cent weeks, as the tenth an­niver­sary of the ori­gin of the BRIC acronym was cel­e­brat­ed, there was much de­bate as to whether the BRICs' con­tri­bu­tion to glob­al growth may have reached its peak.

While some ex­press con­cerns re­gard­ing the de­cel­er­a­tion of these glob­al growth en­gines, oth­ers firm­ly be­lieve these na­tions are still on the path to­wards be­com­ing heavy weights in the glob­al eco­nom­ic are­na. We at Bourse hold the view that the BRIC na­tions are still mov­ing ahead and, in par­tic­u­lar, we see op­por­tu­ni­ties in short- to medi­um-term USD bonds is­sued in those coun­tries.

The 'great trans­for­ma­tion'

Eco­nom­ic growth

The last decade was in­deed the decade of the BRICs, as there was a shift to­wards emerg­ing mar­kets as the ma­jor en­gines of glob­al growth. Among the emerg­ing mar­kets, the BRIC na­tions rose to promi­nence giv­en their ro­bust growth per­for­mance, healthy trade sur­plus­es and large for­eign ex­change re­serves. Fig­ure 1 shows that dur­ing the pe­ri­od 2002 to 2011, the BRICs' rate of eco­nom­ic ex­pan­sion sig­nif­i­cant­ly out­paced both the ad­vanced economies and world growth. Fol­low­ing the 2008 fi­nan­cial cri­sis, the re­silience of the BRIC economies were high­light­ed as these coun­tries were the first to re­cov­er from the glob­al down­turn. Boom­ing do­mes­tic de­mand and rapid ex­port growth aid­ed the BRIC re­cov­ery, as their stock of for­eign ex­change re­serves per­mit­ted their gov­ern­ments to em­bark on ex­pan­sion­ary poli­cies, aimed at main­tain­ing their up­ward growth tra­jec­to­ry.

With the World Bank ex­pect­ing a mod­est glob­al growth rate of 2.5 per cent, the year ahead is ex­pect­ed to be tur­bu­lent. How­ev­er, de­spite some slow­ing of eco­nom­ic ac­tiv­i­ty in the past year, the BRIC coun­tries are ex­pect­ed to con­tin­ue their eco­nom­ic ex­pan­sion in 2012. In fact, the IMF has fore­cast­ed an av­er­age growth rate of 6.0 per cent, as op­posed to the 1.9 per cent growth rate ex­pect­ed for the ad­vanced economies. With the dis­par­i­ty be­tween the growth tra­jec­to­ry of emerg­ing and ad­vanced economies ex­pect­ed to con­tin­ue, the con­cern that the BRICs con­tri­bu­tion to glob­al growth have peaked, ap­pears to be pre­ma­ture.

Debt lev­els

In stark con­trast to ad­vanced economies in the Eu­ro­pean sphere, which are in the midst of a sov­er­eign debt cri­sis, the BRICs' debt lev­els were pos­i­tive­ly im­pact­ed by their gov­ern­ments' rel­a­tive fis­cal dis­ci­pline over the past decade. Fig­ure 2 il­lus­trates that the BRIC coun­tries' debt lev­els are sig­nif­i­cant­ly low­er than ad­vanced economies, such as the Unit­ed States and the Eu­ro­zone. As such, fis­cal pru­dence and sound macro­eco­nom­ic poli­cies, con­tributed to the BRIC coun­tries be­ing able to main­tain their in­vest­ment grade sta­tus, un­like the Unit­ed States, France and oth­er ad­vanced na­tions, which ex­pe­ri­enced cred­it down­grades over the past year.

In­ter­na­tion­al re­serves

The BRIC na­tions ac­count for more than 40 per cent of the world's in­ter­na­tion­al re­serves and are among the top ten hold­ers of for­eign ex­change re­serves in the world. As Fig­ure 3 il­lus­trates, Chi­na is the world's largest hold­er of for­eign ex­change re­serves (ac­count­ing for 31 per cent of glob­al re­serves), while Rus­sia, Brazil and In­dia are ranked third, sev­enth and ninth, re­spec­tive­ly.

The Bourse view

Against such a sol­id eco­nom­ic back­drop, the BRIC na­tions ap­pear to be bet­ter equipped than the ad­vanced economies in weath­er­ing any tur­bu­lence in the in­ter­na­tion­al econ­o­my. Our view, which is sim­i­lar to that of many in­ter­na­tion­al hous­es, is that ro­bust eco­nom­ic growth, low debt lev­els and strong for­eign cur­ren­cy re­serves of the BRIC coun­tries will as­sist them in weath­er­ing any ad­verse de­vel­op­ments in the glob­al econ­o­my. As such, Bourse is of the view that these BRIC coun­tries can pro­vide in­vestors with su­pe­ri­or re­turns and are among our pre­ferred in­vest­ment des­ti­na­tions. We will now briefly ex­plain some of the fixed in­come in­vest­ments that the BRIC na­tions can pro­vide.

Bourse fixed in­come rec­om­men­da­tion

With an in­vest­ment grade cred­it rat­ing and bright out­look for the medi­um- to long-term, Brazil, Rus­sia, In­dia and Chi­na's gov­ern­ment bonds can pro­vide US$ in­vestors with high qual­i­ty, and rel­a­tive low risk in­vest­ments. How­ev­er, in re­cent months, these bonds have ral­lied and are cur­rent­ly un­at­trac­tive­ly priced, re­sult­ing in low yields. Nev­er­the­less, in­vestors can get rel­a­tive­ly com­pet­i­tive re­turns by slight­ly in­creas­ing their cred­it risk and in­vest­ing in var­i­ous qua­si-sov­er­eign cor­po­ra­tions with­in the BRIC group­ing. Those look­ing to in­vest in the BRIC coun­tries have sev­er­al high qual­i­ty cor­po­rate bonds to choose from. To mit­i­gate the ef­fects of any po­ten­tial tur­bu­lence in the in­ter­na­tion­al econ­o­my, in­vestors should place a greater em­pha­sis on the qual­i­ty of the fixed in­come as­sets they in­vest in, and con­sid­er cor­po­ra­tions with strong fi­nan­cial per­for­mance and good cred­it qual­i­ty. For in­stance, in our own book, we cur­rent­ly have some of these in­vest­ment grade cor­po­rate bonds which gen­er­ate yields with­in the range of 4 per cent to 6 per cent in the medi­um-term (five to sev­en years).

By ex­tend­ing their in­vest­ment hori­zon in­to the medi­um term, in­vestors will re­ceive su­pe­ri­or re­turns when com­pared to hold­ing US$ short-term bank de­posits, which are cur­rent­ly yield­ing less than 1.0 per cent, or US$ mon­ey mar­ket funds which now pro­vide yields in the range of 1.25 per cent to 1.85 per cent. These bonds can be held to ma­tu­ri­ty or sold for mar­ket val­ue in case of unan­tic­i­pat­ed need for US$ cash. These in­vest­ment grade bonds can be ac­quired for lo­cal in­vestors by sev­er­al li­censed in­vest­ment firms, of which Bourse is one. Al­ways in­ves­ti­gate to en­sure that the in­vest­ment firms that you deal with have the qual­i­ty and depth of re­search to guide you in your se­lec­tion of bonds.

This re­port is for in­for­ma­tion­al pur­pos­es on­ly and does not con­sti­tute an of­fer or so­lic­i­ta­tion to buy or sell any mu­tu­al funds or se­cu­ri­ties dis­cussed here­in. The in­for­ma­tion and any da­ta con­tained here­in have been ob­tained from fi­nan­cial da­ta pro­vid­ed to us by the is­suers of the sub­ject mu­tu­al funds or se­cu­ri­ties. In­vestors wish­ing to pur­chase any of the mu­tu­al funds or se­cu­ri­ties men­tioned should con­sult an in­vest­ment ad­vis­er. Pro­jec­tions and es­ti­mates are those of Bourse Se­cu­ri­ties based on cur­rent avail­able in­for­ma­tion.

Bourse Se­cu­ri­ties Ltd

E-mail us at: askus@bourse­fi­nan­cial.com,

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