Forget the BRICs; Here's a Better Way to Think About Emerging Markets

It has been a decade since Goldman Sachs economist Jim O'Neill coined the acronym "BRIC" (Brazil-Russia-India-China) as a handy shorthand term for emerging-market economies that were likely to experience above-average growth in the process of converting from predominantly rural, agrarian living to more urban, industrial modes. Since then, there have been giddyups (Brazil's stock market up 97% in 2003) and downs (Russia's bourse down 72% in 2008), but overall, the trend line for the first decade of the 21st century pretty much played out the way O'Neill expected: outsized growth among the BRICs.

Of late -- the past couple of years -- the BRIC's stock indices have generally just matched or even underperformed the U.S. market, but investors who place their bets in accord with macro economic, political, and social trends are mostly still comfortable with the proposition that the BRICs are likely to continue to outperform in terms of GDP growth at least between now and 2020 ... and probably beyond. Not that faster GDP growth necessarily guarantees superior market performance. But all things being equal, it's a valuable advantage to have.

With that in mind, let's look at market performance through the first decade of the 21st century. Here's the annualized performance of the leading stock market index for each of 16 selected nations:

This being an exercise in investment analysis, we've only included indices for which at least one index-tracking exchange-traded fund with a market cap of $1 billion or greater and average daily volume of 1 million shares or more is available to U.S.-based investors. (There have been some outstanding performances from more thinly capitalized and traded national ETFs, but being less liquid, those generally constitute more risky investment vehicles subject to larger valuation swings in times of high volatility, so I excluded them. Besides, we were running out of colors on our chart.)

And the winners are ...

What this chart tells you is that if you had invested $10,000 in the Russian stock market -- diversified to match the composition of the RTSI (which is to say, weighted in favor of energy and raw-materials companies) -- at the close on Dec. 29, 2000, by Dec. 30, 2010 ,you would have had $123,544, which amounts to a return on investment of 1,135% (the 1,235% on the chart minus the 100% of your investment you began with). This is equivalent to a decade-long compounded annual growth rate (CAGR) of 29%. Sure beats the average hedge fund!

In the second tier, the indices of Mexico and India had around 20% CAGRs, and Brazil and South Korea were around 15%.

In the next tier -- CAGR of 5% to 8% -- were the stock markets of Malaysia, Taiwan, and Singapore, respectively.

The fourth tier was composed of four markets that turned in CAGRs of around 4%: Hong Kong, Canada, Australia, and China.

Finally, bringing up the rear were four essentially flat-to-negative indices: Germany, the USA, the U.K., and Japan. Here's a rundown of all the markets in our chart along with the pertinent ETF or ETN:

Country Market Symbol (Yahoo!) Security Symbol
Russia RTSI RTS.RS Market Vectors Russia (NYSE: RSX  )
Mexico SE IPC ^MXX MSCI Mexico Index (NYSE: EWW  )
India BSE SENSEX ^BSESN India Earnings (NYSE: EPI  )
Brazil IBOVESPA ^BVSP MSCI Brazil Index (NYSE: EWZ  )
South Korea KOSPI Composite ^KS11 MSCI South Korea Index (NYSE: EWY  )
Malaysia Bursa Malaysia ^KLSE MSCI Malaysia Index (NYSE: EWM  )
Taiwan Taiwan Capitalization Weighted Stock TAIEX MSCI Taiwan Index (NYSE: EWT  )
Singapore Straits Times ^STI MSCI Singapore Index (NYSE: EWS  )
Hong Kong Hang Seng ^HIS MSCI Hong Kong Index (NYSE: EWH  )
Canada S&P/TSX Composite ^GSPTSE MSCI Canada Index (NYSE: EWC  )
Australia S&P/ASX 200 ^AXJO MSCI Australia Index (NYSE: EWA  )
China Shanghai Composite 000001.SS FTSE China 25 Index (NYSE: FXI  )
Germany DAX ^GDAXI MSCI Germany Index (NYSE: EWG  )
USA S&P 500 ^GSPC SPDR S&P 500 (NYSE: SPY  )
U.K. FTSE 100 ^FTSE MSCI United Kingdom Index (NYSE: EWU  )
Japan NIKKEI 225 ^N225 MSCI Japan Index (NYSE: EWJ  )

The outliers
When you look at the original BRICs, the one that stands out as being most unlike the other three is Russia. Russia was a way more developed country in 2000 than China or India in terms of per-capita GDP, income, urbanization, telephones, transportation, and so on ... and was generally ahead of Brazil in most of these categories.

When you are looking for growth, being further ahead in terms of development is not a plus, because it implies that future growth will be moderate. Additionally, Russia was one of the few nations in 2000 with a declining population -- also bad for growth. You'd expect these factors to inhibit market performance -- and many people criticized O'Neill's decision to include Russia among the BRICs -- but in fact the combination of its focus on the energy sector -- which was hot because of galloping Chindia demand -- and the fact that its market was beaten down in the '90s with all the travails and uncertainty following the demise of the USSR propelled it to the top of the heap for the decade. Pretty good performance for a country where a multibillion-dollar public company like Yukos can be arbitrarily destroyed by the government. Actually, it's instructive that while in the wake of the 2003 Yukos incident, appreciation in the value of the RTSI slowed down for a year, the financial-meltdown-related drop in the price of oil in 2008 crashed the RTSI! Clearly (1) the market considers energy demand to be a much more significant factor for Russian valuations than government interference, and (2) because of the RTSI's energy concentration -- and the price of oil fell from $145/barrel to $32/barrel in six months in 2008 -- it is by far the most volatile of the BRICs indices.

Of course, when you look at our chart, the BRIC that's the biggest contrast to the others is China ... and the comparison is not favorable. At just a 3% CAGR, the Shanghai Composite's decade looks much more like the (non)performance of the S&P 500 than the buoyant curves generated by the RTSI, SE IPC, or BSE SENSEX. There is a good reason for this dissonance, and it has nothing to do with China's underlying growth rate, which remained strong. China's market index includes heavy weightings for many huge, formerly state-owned -- and still partially state-owned, in most cases -- enterprises that have frequently found the transition to free-market competition challenging.

Top-line growth has generally kept pace, but sufficient quantities of black ink have been lacking. Many of these enterprises are debt-laden, and it's unclear how many of them will ultimately survive. In the long run, the performance of the successful companies will improve, and the relative weight of the laggards will decline as they fall by the wayside and are supplanted by more competitive enterprises. In the meantime, the performance of the Shanghai Composite is likely to continue to reflect China's growth less effectively than, say the Hang Seng (although the same issues are reflected there to some extent) or even the Taiwan index. Generally speaking, Chinese index ETFs have not been as effective investment vehicles for transporting their economy's underlying growth into your portfolio as the other BRIC index ETFs.

So ... what's next?
Of course, as the venerable shibboleth goes, "past performance is no guarantee of future returns." How will the BRICs stock markets fare over the next 10 years?

As I mentioned, there's not much debate among macro-analysts as to the continued robust validity of O'Neill's basic insight. It would take a lollapalooza of a black swan to dissipate the inertia of the BRICs -- something on the order of an epidemic or a catastrophic natural disaster that killed many millions. So, in that light, the pertinent question is not where the BRICs bus is headed, but rather, who is going along for the ride.

The BRICs themselves -- which began acting as a formal group in 2009 -- officially added South Africa to their number late last year. So they now call themselves the "BRICS." There is some debate about the proper plural form: BRICSs? Fortunately, the small size of the South African economy consigns it to stowaway status at best in the minds of most macro analysts, so we pretty much ignore that nomenclature issue.

O'Neill himself has at various times endorsed South Korea, Mexico, Turkey, and Indonesia as potential bus passengers. I like that thinking, and for now, I'm going to go with the first two, for three reasons:

  1. They are the next two largest economies after the original BRICs (technically after Russia-Brazil-India, as China is already No. 2 in the world).
  2. They are both in the top five on our performance chart along with Russia-India-Brazil.
  3. There are funds that track their stock markets that meet our criteria (available to U.S.-based investors with a market cap of $1 billion or greater and average daily volume of 1 million shares or more).

Thus: China-Russia-Brazil-India-South Korea-Mexico. Or McRIBS for short. It's a small "c" because effectively investing in the China growth story is more complicated than just buying an ETF that tracks their stock market. And, of course, because it makes for a cooler acronym.

Bon appetit!

Guest contributor Brad Hessel currently owns shares of iShares MSCI Brazil Index Fund (EWZ), iShares FTSE China 25 Index Fund, the India Fund (IFN), and ProShares SHORT S&P 500 (SH, which, though not mentioned in the article, effectively makes him short the S&P 500 ETF, SPY) and has no position in any of the other equities mentioned; however, Brad's clients may have such positions. The Fool's disclosure policy includes certain trading restrictions that apply to Brad. However, his clients are not subject to our disclosure policy and thus are free to trade any such equities.

Read/Post Comments (12) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 21, 2011, at 9:40 AM, dboestami wrote:

    You missed Indonesia Stock Exchange (IDX) Sir. Please take a look. You will be surprised of our growing markets. Thanks

  • Report this Comment On October 21, 2011, at 11:33 AM, ETFsRule wrote:

    In my opinion, South Korea is a developed economy and doesn't really belong in this discussion.

    I also think you are making an error in assuming that the countries with the highest returns for the past decade will also have the highest returns over the next decade.

    Anyway, my top 5 countries to watch for the next decade are: Brazil, China, Turkey, Egypt, and Colombia.

  • Report this Comment On October 21, 2011, at 12:28 PM, bhessel wrote:

    dboestami, thanks for your comment. Indonesia is mos def on the radar screen (and was mentioned in the article as a candidate for inclusion in the top echelon). Unfortunately, at present there is no ETF investment vehicle available to USA investors that meets Intelledgement’s risk management criteria (we generally eschew ETFs with less than $1B in assets and an average daily volume of less than one million shares traded in order to minimize liquidity issues). IDX has less then $500 million in assets and trades 700k shrs/day. The other choice, EIDO, is even smaller. But for less risk averse investors, Indonesia certainly merits attention.

    Brad Hessel

  • Report this Comment On October 21, 2011, at 12:59 PM, constructive wrote:

    Most people don't understand that investment returns are not directly correlated to GDP growth and not correlated at all with population growth. Something important to keep in mind.

  • Report this Comment On October 21, 2011, at 1:09 PM, bhessel wrote:


    There are many “developed” countries on the list, including the USA, Japan, the UK, Germany, Australia, Singapore, and Canada, in addition to South Korea. Plus the semi-country Taiwan. And Hong Kong, which while not a country is clearly developed. And, some would argue, Russia (population 99% literate and only 10% agrarian).

    Implicit in the article—and we probably should have made it more explicit—is that the dramatic modernization occurring on an unprecedented scale in (primarily) Chindia provides opportunities for high GDP growth for many countries. Principal among these are the raw materials supplying countries such as Brazil-Russia-Canada-Mexico-Australia, but there are clearly rising opportunities for selling goods and services for the likes of South Korea-Taiwan-Singapore-Hong Kong-Japan. The takeaway being that the BRICs phenomenon looked at from an investing perspective is not strictly limited to the developing countries.

    As for your particular list, we like Turkey a lot; it is in the same boat with Indonesia in that while we like the concept, there is no ETF investment vehicle available to USA investors that meets our risk management criteria. We are less enthusiastic about Columbia, although we agree there is interesting potential there. As for Egypt, given a variety of macro-pertinent factors—can’t feed themselves, imports are double exports, high national debt, limited natural resources, high unemployment particularly among those under-25, unsettled political/social issues—we would steer clear for now.

    Brad Hessel

  • Report this Comment On October 21, 2011, at 1:12 PM, CaptainNeigh wrote:

    Russia is not emerging market. Neither is China.

  • Report this Comment On October 21, 2011, at 1:14 PM, CaptainNeigh wrote:

    And US market is close to little compared to Russia.

  • Report this Comment On October 21, 2011, at 1:29 PM, FesterInvester wrote:

    Like this article briefly states, I think it is really important to not clump Russia in line with the other "emerging markets." It definitely has its own, unique economic qualities, separate from a lot of the less developed, high growth rate countries. Great article!

  • Report this Comment On October 22, 2011, at 3:32 PM, extremebrick wrote:


  • Report this Comment On October 23, 2011, at 6:51 PM, bhessel wrote:


    Hmmm…you raise an interesting point. It is the case that our chart shows the valuations of each national market in nominal terms; inflation is not accounted for. Actually, I am not persuaded that including the 21% decline in the value of the dollar—and thus charting absolute returns—would be that useful. We would then have a basket of oranges in a world of apples, as almost all other ROI figures are provided in nominal terms.

    Howsoever, you have me thinking that what *would* be useful—particularly for USA investors—would be to correct for currency deviations. For example, the compounded annual growth rate of the Australian ASX 200 for the first decade of the century was 4%, as shown in the chart in the article. But that is the CAGR in nominal Australian dollars. In that same decade, the Australian dollar appreciated relative to the US dollar by a total of 83%. So from the perspective of a US investor, the CAGR of money allocated to Australia for the entire decade when you take exchange rates into account was not +4%, but +10%…a huge difference!

    We will run some more numbers and consult with the TMF editorial staff to see if another chapter here is warranted. Thanks for your comment!

    Brad Hessel

  • Report this Comment On October 26, 2011, at 9:24 AM, ParetoEq wrote:

    The problem with economies such as Brazil is that there is an absurd level of proteccionism that distorts its international trade. Levels of societal welfare are very low indeed. This economy, for example, will perform relatively well as long as there is international demand for its raw materials. The day that reserves are low, Brazil heads for the long anticipated wakeup call and panic mode.

  • Report this Comment On March 24, 2012, at 10:12 AM, bhessel wrote:


    FYI, we did publish an update “correcting” the performance numbers by including the effects of currency fluctuations over the first decade of the century. The resulting chart gives a truer picture of how a US-based (or dollar-based) investor would have fared, on average, in the various national bourses 2001-2010:

    Brad Hessel

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