The four BRIC countries – Brazil, Russia, India and China – are posting spectacular growth rates. Credit Suisse analyst Pascal Rohner tell us more about the reasons behind their success and why it is the right time to invest in these markets.
Pascal, you are an emerging market strategist. How large is the combined GDP of the BRIC economies as a proportion of global GDP today?
Pascal Rohner: Ten years ago it was still pretty small, just accounting for around 8 percent of global gross domestic product (GDP). Now, after the strong growth posted in recent years, it accounts for 10 trillion US dollars, which is around 17 percent of global GDP.
Do you expect their combined GDP to overtake the G7’s in the longer term?
Yes. Even though at the moment, their combined GDP is still around three times smaller than the G7’s, we believe it will take less than 25 years before the BRIC economies will be larger than the G7’s.
What are the main drivers behind their growth?
Well, the main drivers are the same as in the last years. We have infrastructure, urbanization, global trade and commodity exports, but increasingly also consumption.
You just mentioned infrastructure. Could you extrapolate?
Even though the BRIC countries have invested a lot in their infrastructure over the last years, there is still a big need for further investments. The OECD actually expects that they will need to invest about 5 percent of their GDP annually, just to achieve the targeted growth numbers.
Do you mean roads, bridges?
Mainly cities, the power plants, roads, railroads, ports etc.
How about the role of consumption?
As I said before, consumption is really becoming a driving force for future economic growth. The main driver is the massive expansion of the global middle class. We believe that the global middle class will more than double in the next 20 years, to more than 3.4 billion people, driven by Asia, mainly China and India.
Are these rising consumption and infrastructure needs driving the demand for commodities?
Yes, absolutely. The huge infrastructure projects, as well as the changing life styles will create a big demand for base metals, for oil, but also for soft commodities in the future. This is obviously positive for commodity exporters, such as Russia and Brazil.
Is it a good time to invest in the BRIC economies right now, or are they overvalued?
We believe it is a good time to invest in the BRICs, even though the story is not new.
It is more or less a consensus call. If you look at the valuations, after the underperformance of last year, the price-to-earnings multiples (P/E) are now more or less in line with historical averages. This basically means there is no bubble at all at the moment.
Can you specify?
If we look at Russia and China we see that their P/E ratios are now below historical averages. In India and Brazil, the picture is slightly different, as we see slight valuation premiums, but these still have not reached bubble territory.
Which risks should investors be aware of?
If we look at the current situation, the main risks are food inflation and political uncertainty. We however believe that the risks in the BRIC economies are manageable. When it comes to equity investments, it is also very important to look at the global risk appetite. If we see a drop in the global risk appetite, we obviously see a correction in these types of risky assets.
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Global Trends
18 July 2011