As long-term equity investors, GSAM's pension fund clients have broad market exposure to global equity, but we would contend that the long-term investment prognosis for the Brazil, Russia, India and China - or, as it is more euphemistically known, the BRICs - warrants the consideration of a standalone investment.
In 2001, Goldman Sachs coined the concept of BRIC (Brazil, Russia, India, China), identifying some of the world's fastest growing economies. It was forecasted that the BRIC economies could collectively rival the G7, in terms of share of global growth, by 2050. In addition our economists, led by Jim O'Neill, suggest that over the next few years, the BRIC countries will grow faster than other emerging markets and at a significantly higher rate than the developed economies.
We wanted to share with you the fundamentals underpinning the BRICs secular growth story.
1. Greater monetary flexibility
In the 1980s and 1990s, BRIC countries' balance sheets were over levered and burdened by large deficits financed by heavy external borrowing. This resulted in several emerging market-based crises, but also served as a lesson for many emerging market central banks. The BRIC countries' more conservative behaviour over this past decade was reflected in the cleanest balance sheets in their histories. This allowed them greater monetary flexibility than most developed markets, better positioning them to weather the most recent downturn by, for example, cutting interest rates.
2. Healthy corporate balance sheets
A similar story is apparent in the corporate sector. Fundamentals are robust, as evidenced by their returns on equity (ROE), which are above their historical levels and their developed market peers. Importantly, this improvement has come with significant deleveraging such that debt/equity ratios of BRIC companies are now substantially lower than those of developed market companies. BRIC corporations are also posting strong free cash flow, a particularly valuable attribute while credit markets remain tight.
3. Valuations supported by strong fundamentals
The strong rally in 2009 lifted BRIC equities from crisis-induced lows back to long-term average valuations, when measured by price/earnings, price/book and dividend yield. Furthermore, valuations are comparable to those for developed markets, despite the BRICs' significantly stronger growth profile. We expect this growth to be fuelled by:
• domestic consumer demand;
• robust infrastructure spending;
• technology-driven improvements in productivity.
In summary, we believe we are in the midst of a seismic shift of global growth from developed to developing markets and we believe that investing in BRIC countries is key to increasing emerging markets equity exposure and is therefore worth due consideration for pension investors to take advantage.
To discuss these themes further please call - Kathryn Koch, client portfolio manager, global fundamental equity.
Tel: 44(20)7774-5619 Email: [email protected]