4 economies that shine -- for 2050

By Tim Middleton

Pssst! Here is some inside information from Wall Street's most prestigious investment bank. Build your portfolio out of BRICs -- the stocks of Brazil, Russia, India and China.

Thirty-five years from now, BRICs will be the blue chips of foreign stocks, according to Goldman Sachs & Co. When that happens, their returns will be lower. But in the last three years, while Morgan Stanley's foreign developed-market index has advanced just under 20% annually, its BRIC index has shot up 36.6% a year. That's one-third more than emerging markets in general.

So the time to buy BRICs is while they're still cheap. The BRIC idea is so new that only one U.S. mutual fund has been created to specialize in these four emerging markets, but more are likely to follow. Overseas, where fewer regulations make it possible to bring out funds more quickly, there are 10 of them.

Not for everybody

These funds have taken in $4.2 billion of net inflows this year, about one-fourth of all dedicated emerging-market equity funds tracked by Emerging Portfolio Fund Research. All together, BRIC funds have assets worldwide of $9 billion.

The single U.S. offering, Templeton BRIC (which doesn't have a ticker symbol yet because it has less than $30 million in assets), has a doppelganger in Germany that is one of those 10. Templeton BRIC Fund A (t) (DE:A0F6YZ) is ahead 9.9% this year, as of July 4. The lead manager of both funds is Mark Mobius, the dean of emerging-markets investing.

A concentrated bet like this is not for everybody. A diversified emerging-markets fund is less risky, and the risks in these four countries are daunting. According to the Economist Intelligence Unit, there's about a 40% chance that any of these nations could renege on its financial obligations.

And the recent correction in emerging markets, as I explained in a column in May, could lead to further declines in coming months. But it could also be creating a buying opportunity for the bold.

"It's a terrible time to be selling a fund like this, but a good time to be buying one," says Mobius by telephone from Hong Kong.

If you are the kind of investor who has a percentage of assets invested in emerging markets, you should consider replacing as much as one-third of that allocation with a BRIC fund.

2035's economic giants

The BRIC countries are not necessarily the largest among developing nations: Indonesia's population dwarfs Brazil, and Pakistan is 15% more populous than Russia. Nor are they the fastest-growing from year to year; Turkey's gross domestic product (GDP) is growing faster than any country on Earth except China, at 9.5%, and Brazil's 3.4% growth rate is the slowest among large developing countries.

But a 2003 study by Goldman Sachs concluded that, based on recent trends, the BRIC countries will have knocked the United Kingdom, Germany, France and Italy out of the G6 (the world's largest economies) by 2030 or 2035. Japan and the United States will remain in the G6, but Japan's economy will be overtaken by India's by 2032, Goldman predicts, and China will supplant the U.S. as the world's top economy by 2041.

These four markets are expected to vastly outperform the rest of the developing world for a host of reasons. India has the largest pool of highly educated English-speaking talent on the globe. China has managed to fuel 10% annual growth for two decades despite nominal opposition to the very idea of capitalism. Brazil's government is the most stable and progressive in Latin America. Russia, despite an infestation of gangsters, has the oil reserves and other resources it will take to lift its people out of their economic black hole.

And all four of the BRICs are huge, in land area as well as population. Their incorporation into positions of world economic leadership will entail enormous spending on infrastructure, with most of those reals, rubles, rupees and yuan spent by indigenous companies.

Even these currencies are expected to appreciate enormously in value in coming decades. "About two-thirds of the increase in U.S. dollar GDP from the BRICs should come from higher real growth, with the balance through currency appreciation," the research report says. "The BRICs' real exchange rates could appreciate by up to 300% over the next 50 years (an average of 2.5% a year)."

The bottom line: The economies of the BRIC nations, which currently amount to about 15% of the total of today's G6 in terms of GDP, will be equal to half the G6 by 2025 and will surpass it by 2050.

Too big to fail

In Goldman's view, the world's Big Three economies in 2050 will be China, the U.S. and India, in that order, followed by three much smaller siblings, Japan, Brazil and Russia. Everyone else will be an also-ran.

Mobius argues that the BRIC nations are too big to fail. "If they get into big trouble, everybody is going to be in trouble," he says. Market risk "is the least of my worries, frankly."

Rather, he says these countries have rebounded smartly since May's downturn. "We have to be very, very careful we're not buying expensive stocks," he says.

This is a compelling story but it isn't well known, so I don't think the BRIC idea will sell itself. Load funds -- and Templeton charges a load of 5.75% on this one -- are typically the fund industry's pioneers, because brokers are paid to take the time to sell the stories behind new investing concepts.

Among no-load fund companies, the largest, such as Fidelity, Vanguard and T. Rowe Price, say they have no immediate plans for BRIC funds. Their market, represented in an organized way by independent financial advisers, is cool to the idea.

I took an unscientific poll of about two dozen advisers and not a single one endorsed the concept, recommending instead a diversified emerging-markets fund. Typically advisers like a new investment theme to season for five years before recommending it.

If your clock runs a little faster than that, and mine does, I'd watch the fund marketplace for the next year. I predict something attractive and attractively priced will come along. And waiting a bit to buy will do no harm. This is a truly long-term investment idea, and it will be just as solid in a year as it is now.

It might even be more solid if one of these countries melts down in the meantime. As Baron Rothschild is thought to have said (it was actually Bernard Baruch), the time to buy is when there is blood in the streets. In countries like these, that's not just a metaphor.

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At the time of publication Timothy Middleton didn't own any securities mentioned in this article. Middleton is the author of "The Bond King: Investment Secrets of PIMCO's Bill Gross" and the former mutual funds columnist of The New York Times. He works from home in Short Hills, N.J.