The New “BRICs”
By Bernice Napach
The BRIC countries—Brazil, Russia, India and China—were the stars of emerging markets in the last decade, but now their growth is slowing. So who will be the next big leaders among developing economies?
Ruchir Sharma, head of emerging market equities and global macro at Morgan Stanley, tells The Daily Ticker's Dan Gross that the next countries investors will flock to are Poland and the Czech Republic in Europe and the Philippines, Indonesia, Thailand and Sri Lanka in Asia. He discusses them all in his new book, "Breakout Nations: In Pursuit of the Next Economic Miracles."
Sharma defines breakout nations as countries that beat economic expectations by a wide margin. "People tell me if India grows at six to seven percent what's the big deal? I say it matters a lot because when you expect eight to nine percent and you come up with six percent, that's a big disappointment."
Another key indicator: per capita income. The lower it is the easier for those economies to grow, says Sharma.
Sharma says Poland and the Czech Republic are the "sweet spots" in Europe. They're part of the European Union but aren't on the Euro, and that gives them more flexibility to manage their economies.
Poland was the "only economy in Europe that didn't contract in 2008 and 2009," Sharma says. Both Poland and the Czech Republic have "manageable debt levels" and are attracting investments from foreign countries, which boosts growth, he adds.
His "breakout nations" picks in Asia are the Philippines, Indonesia and Thailand. All three "suffered a lot in the 1990s when China devalued its currency and took away a lot of their manufacturing base," Sharma says. "Now the opposite is happening. China's currency is appreciating a lot and Chinese wage inflation is picking up. These economies can benefit from the fact that their currencies are quite competitive and we could see some manufacturing return to these economies, which are also well run now." Last Friday China reported that first quarter growth slowed to an annual rate of 8.1% from 8.9% in the fourth quarter of 2011.
Sharma also likes Sri Lanka, an example of a "frontier market," which he defines as "out of the mainstream emerging markets" -- relatively undiscovered with a lot of upside potential but not correlated to other global markets. Nigeria and Kenya also fit that bill.
He warns investors NOT to buy commodities as a way to get exposure to emerging markets. "Commodities don't help in the long run," Sharma says. "The average real return of commodities in the last 100 to 200 years is negative."
