Is This The BRICs Decade?

Is this the BRICs decade?

Last decade saw the emergence of the BRIC nations. The world witnessed their growing economic power and global influence. The BRIC’s signify the shift of global power from west to the emerging nations. Over the past 10 years they have contributed over a third of world GDP growth and grown from one-sixth of the world economy to almost a quarter (in PPP terms).

The last decade surely belonged to the BRIC’s, but will the next decade witness similar rise in their power? Many of the trends that we see today will continue into the next decade; in fact they are bound to become even more pronounced. According to a Goldman Sachs report the BRIC as an aggregate will overtake the US by 2018. Brazil’s economy will be bigger than Italy by 2020. India and Russia will be individually bigger than Spain, Canada or Italy.

The striking story in the next decade will be the rise of the new BRIC middle class. Last decade saw a phenomenal growth in the middle class and this trend will continue into this decade. In the last decade the number of people with incomes greater than $6,000 and less than $30,000 increased by hundreds of millions and this number is set to rise even further over the next 10 years. This growth in the middle class is one of the most significant reasons for the rise of the BRIC’s. This growth in middle class means more demand potential for all types of goods and commodities. There will be a change in demand pattern, with the BRIC’s importing more high value added goods and the import of low value added goods will see a fall. 

In the last decade the BRIC equity markets outperformed the developed markets because the strong growth of these economies surprised many. The BRIC story attracted lots of funds into these markets. At the same time the valuations were much cheaper in 2000 compared to the developed markets. Today the BRIC story is well known, expectations are higher and valuations are comparable to the developed markets. So the same outperformance of last decade might not be seen even if the BRIC’s deliver strong results.

Will this be the decade of the new middle class?

One major factor contributing to the BRIC story will continue in the next decade too. This is the growth of the middle class. Rising incomes in the BRICs will create a massive new middle class.

Growth in the middle class will be led by China, and its middle class will peak in this decade. India’s middle class will continue to grow throughout this decade and also in the coming ones. Other BRIC nations (and emerging economies) will also see a growth in their middle class. As China and India are the most populous countries, the rising incomes in these countries will affect global demand more than any other country could. 

This explosion in the middle class will lead to changes in demand patterns, resource competition. Environmental pressures will become more accurate. Demand for energy will increase.

Will BRIC equity continue to outperform the developed markets?

The last decade was a BRICs’ decade for stocks: the Russian traded index rose by a sizeable 884%, followed by China H-Shares (610%), the BSE in India (319%), and the Bovespa in Brazil (294%). While BRICs equity markets may continue to do well, some factors that led to this extraordinary outperformance are less clear now.

On the other hand the growth in demand and consumption due to the growth of a massive middle class might drive the BRIC equities to outperform the developed market. Though the outperformance will be less than what we saw in the last decade. This is because markets reward performance when they are better than expected or are in lesser looked at markets. At the start of the decade the valuations in BRICs was relatively low compared to major markets. But since then the BRIC story has become quite famous and now the markets have valued in these growth prospects.

Thus we can safely say that the BRIC story will continue to be strong in this decade backed by the strong growth in the middle class and the rising income levels. The Equity markets will perform well but outperformance will be less significant. We might also see the rise of many more emerging markets in this decade. But one thing is for sure, the BRIC’s will be in focus in this decade too.