Happy New Year! Something very, very important happened in the closing days of 2010, and very few people noticed. The “BRIC” club is expanding to include South Africa. Today I’ll discuss this development and tell you what it means to your investment portfolio.
BRIC is the combination of Brazil, Russia, India and China — the top emerging market nations. The term was coined in 2001 by Goldman Sachs strategist Jim O’Neill to describe the four nations he thinks will collectively rival the U.S. for world economic leadership by the year 2020.
Enter South Africa
Jacob Zuma, president of South Africa, had been openly asking to join the BRIC club for a long time. He made official visits to all the members since taking office last year and has told anyone who would listen how Africa in general, and South Africa in particular, was ready to take a bigger place in the world economy.
Apparently his persistence paid off …
On December 23, Chinese president Hu Jintao wrote a letter to Mr. Zuma informing him of the current BRIC members’ decision to invite South Africa into their group.
With all due respect to South Africa, was it really the best choice? Indonesia, South Korea, Mexico, Nigeria, Pakistan and Turkey are all big players, too — bigger in some ways. But the more you think about it, the choice was probably pure genius.
The fact that the invitation came via China may be a clue. In recent years the Chinese have made a big effort toward developing Africa’s rich natural resources. South Africa, in turn, has forged an economic leadership position for itself in the continent.
The decision makes more sense if we look at South Africa not by itself but as a representative of Africa in general. Whether the neighborhood even wants South Africa to “represent” it isn’t clear — but it also doesn’t matter. The deal is done.
I expect the BRICS bloc (or BRICSA or whatever the new acronym turns out to be) will continue to expand. It won’t surprise me if we see each of the four original members get the privilege of inviting a nation of their choice into the alliance …
- Russia would probably like to see Indonesia in the club. They are already big buyers of Russian arms, and Indonesia’s oil reserves and strategic location would make it a key addition.
- India may be in a position to invite the first Middle Eastern nation into the BRICS. Egypt or Turkey would be good candidates. So would Iran, if they really want to annoy the U.S.
- Brazil could really make some waves by taking Mexico under its wing. This would bring the BRIC competition right up to the borders of the U.S. And for its part, Mexico might jump at the chance to escape from the shadow of its northern neighbor.
This is all just speculation, of course. The BRICS leaders haven’t shared their expansion plans with me. In any case, though, the American/European/Japanese economic domination is in for some serious competition in the coming years.
So what do you do about it?
Trading the BRICS with ETFs
The emerging markets, BRICS and otherwise, are now the global growth engines. They increasingly have a stranglehold on the world’s natural resources as well. This is why I rarely recommend developed market equity exchange traded funds (ETFs). I would much rather go where the growth is, and that means emerging markets.
We haven’t yet seen how the BRIC-focused ETFs will handle the South African development. As noted above, the BRIC investment theme isn’t necessarily tied to the political alliance that has emerged.
While South Africa’s economy and population are rather small in comparison to the other four BRIC nations, its markets are relatively more developed. South Africa would be the third largest member in a capitalization-weighted BRIC portfolio. Even if the current BRIC portfolios stick with the original four, I expect some sponsor will bring out a BRIC + South Africa ETF.
You don’t have to wait, though … you can build your own BRICS fund in whatever proportions you like! Just put together a portfolio of single-country ETFs that cover all five BRICS. I prefer targeting the small-cap companies within each of these countries as they are more closely tied to their internal growth prospects.
Here are some candidates to consider:
- Brazil: Several Brazil ETFs are now available. I like Market Vectors Brazil Small-Cap (BRF). For large caps, iShares MSCI Brazil (EWZ) is probably the best choice.
- Russia: The three Russia single-country ETFs all take a cap-weighted approach, making them dominated by large-cap stocks. Of these, I prefer the more established Market Vectors Russia (RSX).
- India: You can choose from more than a half dozen India ETFs. Market Vectors India Small-Cap (SCIF) and WisdomTree India Earnings (EPI) are my favorites.
- China: Of the many China ETFs available, two that stand out are Guggenheim China Small Cap (HAO) (formerly part of the Claymore brand) and SPDR S&P China (GXC).
- South Africa: There is really only one choice today and that is the cap-weighted iShares MSCI South Africa (EZA).
I’m not saying you should jump into any of these ETFs right now. I offer them merely as food for thought as you design your portfolio for the New Year.
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