It's impossible for most investors today to have missed a recent popular refrain: "The BRICs will lead the global economy's future." The four member nations of the BRIC economic bloc -- Brazil, Russia, India, and China -- undoubtedly have many qualities bolstering their growth prospects, including about a fifth of the world's economy and 40% of the global population.
The future is not set in stone, however. The BRIC members face towering obstacles to growth, and any investors putting their money behind this supposedly immutable trend need to take a cautious look at what's coming.
Best of the BRICs
Much hype has surrounded India's potential. After all, the nation of more than a billion people is democratic and ideally located in the world's hotbed of emerging growth around the Indian Ocean. Innovative, investor-friendly companies have also emerged from the subcontinent, such as automaker Tata Motors (TTM +0.00%) and IT servicer Infosys (INFY 2.43%), the latter reaching the 15th spot on Forbes' most innovative companies list.
To be sure, India looks like the BRIC with the most potential for investors. Tata, for example, has competed well in a competitive global auto industry and has even set its sights on introducing its designs to the U.S. market. American companies have realized this as well: Dow companies such as General Electric (GE 0.80%) have invested in the country to take advantage of its central location among emerging markets. So what's the problem here?
Indian businesses face a daunting morass of bureaucratic entanglements at every turn. The Hong Kong-headquartered Political and Economic Risk Consultancy went as far as labeling the nation's bureaucracy as the worst in Asia, citing significant corruption and lack of accountability for bureaucrats. That's not so much a problem for Indian-based companies, but for American or other international firms, India's way of business presents a challenging obstacle.
That's bad both for companies doing business there and for India's development. Despite its ballyhooed potential, the nation still ranks a lowly 129th in GDP per capita. Nearly 70% of citizens live in rural areas, and India is in desperate need of infrastructure, as the nation's recent blackout of epic proportions demonstrated. The IMF even slowed its projections of India's near-term growth to 6% for 2013 – still a high number when compared to advanced economies such as Europe, yet lagging behind rapidly accelerating consumer prices and nowhere near fast enough to meet prior expectations for an inevitable Indian rise.
Still, there are some opportunities in India's individual companies for the average investor. It's questionable whether India's BRIC colleagues can say the same.
More BRIC blues
Brazil and Russia cede much of the BRIC spotlight to their two comrades, but these hyped future stars have plenty of advantages. Their populations are far wealthier than those of China and India, with per-capita GDPs in the tens of thousands, rather than the mere thousands.
There are plenty of concerns regarding each, however. While Brazil has done well promoting companies such as Petrobras (NYSE: PZE) on the international scene, the IMF cited the strong possibility of slowing future growth in the Latin American region. Indeed, the organization ranked Brazil's growth in real GDP for 2012 to be just 1.5%, far below lofty projections. While that's expected to increase somewhat in later years due to reduced monetary rates, the country still suffers from an infrastructure problem. High taxes and increasing labor costs have also drained the country's competition, and past growth rates of 5% or more look unattainable in the future. Some companies, such as European automakers, have already reported Brazilian struggles.
Russia faces its own troubles, starting with a debt problem. As the IMF reports in its World Economic Outlook, "In Russia, the non-oil fiscal deficit is more than three times larger than it was before the Great Recession." The country's energy exports also face threats as the United States ramps up domestic production and other countries look to increase their energy independence. That's not good for countries like Russia, which is reliant on energy exports to make up growth -- particularly as the world leader in that category.
Given that embattled European nations make up most of Russia's top export partners, the country won't meet lofty growth projections, according to the IMF. The organization expects less than 4% real GDP growth out of Russia in 2013 -- less than 2011's number. Russian-specific ETFs -- even large, ostensibly safer ones like the Market Vectors Russia ETF (RSX +0.00%) -- are simply too unpredictable amid the country's uncertainty.
Paper tiger or sleeping dragon?
China represents the most challenging of the BRIC enigmas. There's no question that the double-digit economic expansion of the past decade is over; the question now is whether China can continue strong growth in light of numerous troubles at home.
Potentially the greatest problem China faces -- even greater than its often-criticized take on capitalism -- is its startling income inequality. Luxury spending has increased rapidly in a nation with a GDP per capita still ranked a mere 99th in the world. Given that the IMF recently illustrated in this New York Times article that income inequality often leads to stunted economic growth, China will face a serious hurdle in bringing its majority of impoverished citizens up to speed.
Apart from devastating infrastructure problems -- e.g., roads that lead to nine-day traffic jams -- China must also figure out how to transition its business model from the cheap labor that ignited its rise into something befitting an advanced economy. While businesses are still happy to ship jobs overseas, numerous competitors from Southeast Asia have recently snapped up China's inexpensive labor -- and all the international business it brings.
China's embarrassing intellectual-property protections have added to its woeful recent record of innovation, as well. While the nation still boasts of some truly innovative companies -- e.g., Internet icons Baidu (BIDU 1.71%) and Alibaba -- and has recently taken the lead on global patent-filing, the country's companies have done a poor job protecting overseas intellectual property. Less than 6% of Chinese inventions are protected abroad. These circumstances will hurt the nation's global competitiveness if they can't be turned around.
With much of the global economy hinged on China's buildup, however, American investors had better hope China continues to grow, if not take the lead in overall economic activity. Still, predictions of a "Chinese century" could fall disappointingly flat for both the Chinese and hopeful investors.
Don't bet the farm
While the BRIC nations may at first seem to have everything an investor dreams of -- massive populations, vast tracts of land, and upstart businesses -- there are far too many dangers here to place your faith in their growth. Isolated companies in the BRICs, such as the aforementioned Baidu and Petrobras, can still offer investors opportunities in these economies. However, the predictions of BRICs leading the future look less rosy by the day. As an investor, stay diversified -- and don't build your financial foundation upon these shaky BRICs.
