Following up on an email from Jon Mason last week, I’m going to be looking at BRIC shares this time round. No, nothing to do with building houses … that whole industry’s about as close to stockmarket poison as you’ll get right now, with Persimmon dipping out of the FTSE 100 index, and Barratt sitting on a mountain of debt and unsold houses.
No, we’re heading far away from UK stocks in search of growth, to the markets in Brazil, Russia, India and China - BRIC for short. Now this may sound a bit exotic for many of us, but many investors, spooked by the relentless downward march of the London and New York stockmarkets, have been quietly salting away funds in Sao Paolo, Moscow, Bombay and Shanghai. These are four very different countries (and indeed are very diverse within their borders) but they are also very different from the currently faltering UK and US markets. There are a number of reasons why professional investors think the BRIC countries offer greater potential.
Firstly, these are swiftly growing economies. We all know about the retreat from state socialism of Russia and China in their different ways, while India and Brazil have huge amounts of investment going in. They are giant countries, with giant populations, and so companies doing well in one of the BRIC nations have huge markets for their products and services. Think about a mobile phone company becoming a market leader in India, or an oil pipeline manufacturer winning state contracts in Russia.
Secondly, these countries tend to have what we can politely refer to as flexible labour laws, meaning they can drive down the cost of production - one of the reasons we in the west have enjoyed ever cheaper consumer goods in the past few years. Gordon Brown might be more honest if he took less credit for his ten years of low inflation and admitted that much of it was down to imported cheap goods from China, India and the rest. The less palatable side of this is that somebody’s paying for your cheap Primark sweater … and there is strong evidence of exploitation not just of adult workers but of children too.
But most of all, these countries are growing and growing fast, the Chinese racing to fast track 200 years of industrial revolution, and that means companies, and their share price, will grow alongside. But of course there are risks. Huge winners and big losers. You may back the pipeline company that wins the big deal … or it may go bust. How do you know that Rio company is well or even honestly run? And though there is much talk of these economies being ‘uncoupled’ from the woes of the UK and US retail and stockmarkets, they depend on us to sell many of those cheap goods … PLUS they are building up inflationary problems of their own.
And you’re buying in a foreign currency, with exchange rate fluctuations, greater charges, it may be difficult to sell your shares.
Okay, stop right there. The way to get exposure to emerging markets (should you wish to take that risk) is not to directly buy shares at all. Arguably the best way in is an exchange traded fund or ETF. They came about in America in the mid-nineties as a way of tracking an index without having to individually buy stocks. The fund buys the stocks and you, effectively, buy shares in the fund so, in theory, you’re getting a tiny piece of all the shares on the Beijing or Moscow stockmarket. ETFs have been set up to track individual sectors, commodities and currencies too.
The advantage of this tracker fund approach is that charges are lower. Put bluntly there isn’t so much work involved in a fund manager simply buying across the sector as there is in investing in individual companies. So you’ll probably pay closer to 0.1% in charges than the usual 1.5% or 2% per year. There are disadvantages too of course. Because they aren’t looking for high performers, you’re unlikely to do better than the index you’re tracking. The upside, of course, is that you also shouldn’t do worse.
And not all ETFs are equal. There are hundreds of these things now, and some may concentrate their buys on the bigger companies in the market, or they may cut out the tiddlers. So there will always be a slight divergence from the average performance of the main Brazil Bovespa Exchange, the Shanghai Stock Exchange or whatever.
So what’s on offer if you want to get into BRICs? Big players include the iShares FTSE BRIC 50, which as the name suggests is quoted on the London Stock Exchange.
Related links: Best performing BRIC ETFs, Main BRIC ETF quoted on the London Stock Exchange
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