BRICs should be 15% of portfolio, suggests LGIM strategist

Investors may need a 15% portfolio exposure to BRIC economies to fully take advantage of the opportunities from countries that now account for a third of global growth, according to analysis by Brian Coulton, emerging market strategist at Legal & General Investment Management (LGIM).

He gave the figure as part of a briefing on the projected economic growth trends for the biggest of the emerging market economies in the coming decade.

Despite noting hurdles for equity investors to overcome, such as currency volatility and questions of market liquidity affecting emerging market assets, he said that “15% doesn’t seem unwise to me.”

He added that some arguments are emerging in favour of exposure as high as 30%, but that this was premature.

Data presented by Coulton illustrated just how far and how fast the BRIC economies (Brazil, Russia, India, China) have come since 2000.

For example, China’s GDP is today the equivalent of France and Germany’s combined. Measured against GDP figures for 2000, it is today the equivalent of the entire GDP of western Europe at that time.

However, LGIM’s analysis also pointed to an easing over the coming decade of what today remain very high rates of GDP growth as compared with developed markets.

For example, Coulton warned that it is unlikely that investments expressed as a percentage of GDP in the BRIC countries can continue on their current trajectory. If they did so they risked moving to “absurd” levels; he said that the rate of investment growth since 2000, if sustained, would theoretically see investments as a percentage of GDP hit a level above 65% in China by 2020, which he described as “not credible”.

Instead, the BRIC economies must go through a rebalancing in the coming decade; from being focused on investments leading to capital goods manufacturing focused on exports to developed markets, they would need to shift towards domestic consumption as a driver of growth.

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