Building Wealth With BRICs: Profit From Globalization

Wednesday, July 16, 2008

Learn more about protecting your assets by investing overseas in International Living Postcards —your daily escape

Dear International Living Reader,

As summer temperatures keep rising, U.S. investors are feeling rather hot under the collar. The Dow Jones has fallen by 12% since October. House prices are in freefall. The price of gas is at a record. And the clowns in Washington seem to be doing everything they can to send the dollar the way of the dodo.

The good news is that you have real alternatives to the U.S.'s crumbling markets. Like the European country that exports more oil than Saudi Arabia...or the Asian giant that dominates the Forbes Billionaires List...

There is still rapid economic growth in many parts of the world. And one simple stock that gives you a chance to invest in four of the hottest markets...

In his 2004 Wall Street Journal article "We think, they sweat," ex-hedge fund manager Andy Kessler argues how Apple's iPod music player is an example of how America's hi-tech prowess guarantees its economic leadership of the world.

He points out that the average iPod sells for about $200. The Chinese company that assembles the devices for export to the U.S. makes a profit of around $5 on each one. But the bulk of the profit—$65 per unit—goes to Apple.

That profit gets passed on to Apple shareholders as it drives up the company's shares. Its rising share price attracts foreign shareholders bringing even more of the money Americans spend on foreign goods back to the U.S.

Multiply that across the economy and, hey presto! It doesn't really matter if all the manufacturing jobs are shipped offshore. Because the real money is being made in the service industries: designing, marketing, and by Wall Street bankers who relieve the foreigners of their hard-earned money. It's a virtuous circle. Just about everyone seems to come out a winner.

It was a wonderful idea. The problem is that it doesn't actually work. Fifty years ago, the U.S. was thriving. Steel factories, textile mills, automobile and electronics manufacturers powered its economy. They made the best products and exported them to the rest of the world.

Times have changed. Today America's biggest export is the dollar itself...and even that is beginning to look like a failing industry.

The simple reality is that Americans buy far more products made outside the U.S. than the rest of the world buys products made in the U.S.A. The end result is that the U.S. now sends some $2 billion in assets and repayment promises to overseas trading partners every single day. Those IOUs add up over time, putting pressure on the dollar.

You don't need me to tell you that that's bad news for America. Just read the headlines: "Sub-prime fiasco"..."Share markets tank"..."The dollar falls"..."Recession fears grow." Add to that sky-high national debt and a record trade deficit in the U.S.

But turn to the emerging markets that produce the goods that Americans buy and you see an entirely different side to this story: Record trade surpluses and white-hot economic growth.

The end result is that the global balance of economic power is now rapidly shifting to those economies.

As a savvy investor, you need to have exposure to these emerging markets. I'll show you one of the simplest ways that you can ride this wave all the way to the bank.

What we are seeing is really just a reversion to the mean. Things are going back to the way they were...

For centuries, the Asian giants--India and China--were the world's leading economic powers. But that began to change in the 18th century. By the mid-19th century, the economic supremacy of the West was beyond contest.

Today, economic power is shifting East. Workers in the West would rather think than sweat. Global manufacturing capacity is rapidly moving to lower cost locations: to Asia, to Latin America, and even to Africa.

Leading the charge are the four so-called BRIC economies: Brazil, Russia, India, and China. These are the powerhouses of the developing world. And they are rapidly emerging as the big winners from the ongoing shift of global economic power.

No country has benefited from that shift more than China. Since it kicked off economic reforms 20 years ago, China has become the world's factory. It now churns out 50% of the world's cameras, 30% of the world's suitcases, 25% of the world's washing machines...and the list goes on...

With an economy growing at more than 10% per year for the last decade--and its surplus of $1.5 trillion in foreign exchange reserves it earned from selling to the rest of the world--China is well on its way to reclaiming its title as the world's biggest economy by 2040. In fact, it's already overtaken the U.S. as the main engine of global economic growth. It accounted for one-quarter of total global economic growth last year.

But there is a lot more to the emerging markets story than China alone. Add in Russia and India, and these three countries were responsible for more than half of global economic growth last year. So it's hard to exaggerate their importance to the global economy.

Right now, with the Western economies reeling from the impact of the credit crunch, global economic growth is being sustained by the BRICs.

The emerging markets are moving much faster than the U.S. and the EU economies. The U.S. economy is predicted to grow by just 0.5% this year. In China, you are looking at 9%.

It's not difficult to see which one an investor ought to be looking at right now.

Consider this year's Forbes billionaires list. Four of the world's 10 richest people are from India. Two of them are in the top five. They've made their money in steel, energy, property, and telecoms...all the building blocks of the nation's future prosperity.

And then there is Russia. Ten years ago, it rocked the global financial markets when it defaulted on its foreign debt. But Russia has seen 10 straight years of economic growth since then. And average incomes in the country have risen six-fold since the start of the decade.

The former communist state is now the world's biggest energy exporter. It exports more oil and gas than Saudi Arabia. The Russian economy is dominated by giant energy and metals producers, and it has profited massively from the global commodities boom. And now it's sitting on the third largest foreign currency reserves in the world—behind China and Japan.

With the commodities super-cycle showing no signs of slowing down, the good times look set to continue in Russia.

Turn to Brazil and you see the same thing happening. Brazil's stock market, the Bovespa, has been a top performer among the world's leading stock markets this year.

While the Dow Jones has fallen by 18% over the last 12 months, the Bovespa is up by 5%, despite the global sell-ff. The country's national oil company, Petrobras, is now worth more than Microsoft and General Electric. And the country is sitting on the biggest oilfield in the Western Hemisphere.

Another Brazilian company, Companhia Vale do Rio Doce, is the world's biggest iron-ore producer. This is the company that will supply the metal from which tomorrow's bridges, skyscrapers, cars, planes, and trains are going to be built. But most U.S. investors have never even heard of it.

It's in these countries that you will find the companies that will dominate the future of international business. In absolute terms the U.S., Europe, and Japan are still far bigger than their emerging markets challengers. The biggest BRIC, China, still accounts for just 4.9% of the global economy. The U.S. has 30.5%.

But that's exactly why I am so excited about the emerging economies. These countries are still in the early stages of their economic development. Investing in them now is like being given the chance to invest in the Western economies in the early stages of the Industrial Revolution. Buying in now—in carefully placed investments—might just be one of the smartest investment moves you could ever make. So, which one of the BRICs should you put your money into?

Quite simply, all of them. Because it makes sense to diversify your investments.

I know of one index that gives you instant exposure to all the top companies in the BRIC economies. So what you are actually investing in here is the broad shift in economic power toward the key emerging markets.

Subscribers to International Living magazine can read my full article here. If you are not yet a subscriber, you can access the July issue instantly by signing up here.

Manraaj Singh
For International Living