Fundamentals Drive the ‘BRIC’ Rebound

Acronyms can often clutter business-speak with clunky jargon. But some distill something unwieldy into a marketer’s dream.

So it has been with the “BRIC” acronym, created in 2001 by a team led by Jim O’Neill, Goldman Sachs Group’s chief economist to mean Brazil, Russia, India and China. The bank fashioned the acronym while making a prediction about the speed of growth of the four biggest emerging markets.
[Jim O’Neill of Goldman Sachs helped coin the Bric acronym.] Bloomberg News

Jim O’Neill of Goldman Sachs helped coin the “Bric” acronym.

Goldman Sachs forecast that the quartet’s collective gross domestic product would constitute more than 10% of global output by the end of this decade. They have surpassed that, reaching 15% last year.

Mr. O’Neill discussed how the BRICs have bounced back from the financial crisis in better shape than their developed peers, whether they have outgrown their moniker and which countries could take their place. Excerpts follow.

The Wall Street Journal: George Soros was saying in March that emerging markets risked being damaged most from the crisis, but the so-called periphery countries have bounced back strongest so far this year. Why is that?

Jim O’Neill: The rebound has been due to the strength of economic fundamentals. When China launched its stimulus program last year, Goldman Sachs said “buy Chinese equities.” Many people thought we were mad, given they had plunged over the previous few months. Now they’re up 80%.

Partly this is down to the growth in the domestic market. The decline in U.S. retail sales has been matched by a rise in China. Chinese retail sales rose 18% year-on-year, according to the latest figures. The rise in car volumes by 48% in June compared to the same time a year earlier is also significant and not solely down to the stimulus.

WSJ: How do you think the crisis has changed the world economy?

Mr. O’Neill: I’m becoming more convinced that the crisis has actually been a good thing for some countries. That’s certainly the case with China, where domestic demand has improved and there has been broader-based growth that is less dependent on exports. Last November’s stimulus has led to social and security reforms.

WSJ: The BRIC countries seem to have done particularly well. Was one reason they bounced back strongly because of the tight grip they had on their banking systems?

Mr. O’Neill: Well, first of all, I should say that I don’t really count the BRICs as emerging markets. They are too big for that. But government ownership of banks was definitely a factor and that is something that many countries in the West are now moving to. Perhaps there’s recognition that there should be more social responsibility for the financial sector and that state control of the banking system is a good thing.

WSJ: Are there some emerging markets that are still a big concern?

Mr. O’Neill: The Baltic states and other parts of Central and Eastern Europe remain troubled, but even there we have diversity. When I was in Tokyo recently, everyone there was asking about Latvia. But Latvia’s economy is a tenth of the size of Tokyo’s. By contrast, Poland is the least exposed and has the biggest and least export-dependent economy.

WSJ: Your team’s research at Goldman Sachs has identified “the next 11” countries that could take up the BRIC mantle. You recently said that Turkey, Mexico, Nigeria, Iran and Indonesia were the leaders among those. Are these the five you would pick as the stand-outs for the second half of the year?

Mr. O’Neill: These five are only similar insofar as they have large populations. Indonesia appears to be on a gentle path to development based on domestic demand, despite the threat of terrorism.

Early signs are that Turkey’s second-quarter GDP figure will show the country has grown, which is quite an achievement and significant in the context of accession [to the European Union], given how challenged developed Europe has been.

Iran is a highly technology-friendly society with a huge population. Nigeria is the largest country on the African continent in population terms and its leaders are keen to engage internationally.

So those four — Nigeria, Iran, Turkey and Indonesia — are on our radar a lot. Vietnam and Mexico are also interesting.

WSJ: Do you think that these countries or the BRICs will able to decouple from the developed world?

Mr. O’Neill: I’m unsure on decoupling. The forward-looking price/earnings ratios for China and India are higher than in the U.S., but at current levels I wouldn’t want to encourage people to invest in China and India who have never invested before; wait for a correction. It is currently cheaper to go via western multinationals.

WSJ: How do you think investors should target emerging markets?

Mr. O’Neill: Emerging markets are a diverse set of countries. So it doesn’t make much sense to invest in a broad-based emerging-markets index. The size of emerging-market countries is one of the most important factors to look at when selecting investments. If a country is able to create sustainable domestic demand, then it has a better chance of being resilient.