BRICs Starts With a B – Brazil Will Be the Next China?

O’Neill said that China would become a major economic power, surpassing the United States by 2035 based on the current speed of economic growth. The economic power and influence of BRICs are growing.

O’Neill’s forecast is logical. The uprising of BRICs is changing the structure of the world and driving the global economy. In the past, the world’s economy was dominated by North America, the European Union and Japan. The combined GDP of BRICs in 2005 reached 4.6 trillion dollars, matching the GDP of Japan. BRICs are beginning to dominate the world’s economy. China is said to be the most prominent of the four countries. It has maintained an average economic growth rate of over 9.6 percent per year over the past 30 years. China’s GDP increased to 2.23 trillion dollars in 2005, which accounts for half the total of the four countries. The economic growth rates of India, Russia and Brazil all surpass western countries and are above average in the world. If the economy of the “golden bricks” of these four countries continues to grow at the current speed, O’Neill’s prediction will come true in the near future. The rise of BRICs is also changing the world order. This is happening not only because of BRICs’ robust economic growth but also because of its role as an initiator and motivator of the new international order. The four countries advocate the democratization of international relations, oppose hegemony and call for respect for global diversification. As developing nations, they have had the opportunity to learn from others and offset their own weaknesses.

The uprising of BRICs is changing the structure of the world and driving the global economy. Members of BRICs are earnestly practicing the style of international relations they have advocated, setting an example of friendly cooperation between different cultures. China and Russia, China and India, China and Brazil as well as Russia and India have all established strategic partnerships. Russia is rich in energy and mineral resources, and Brazil has natural and alternative energy technology. Both China and India are manufacturing giants, and the relationship between Russia and India will doubtlessly be complementary economically.EMBI+ (Emerging Markets Bond Index Plus) risk rating for Brazil has reached another low record of 170 b.p in 03/2007. This reflects the building of confidence by foreign investors in the Brazilian economic policy, that once again gave proof of reliability by paying IMFs $15.5 billion debt in advance and raising a $110 billion reserve.

The five key themes that we believe will shape the performance of Brazilian market equities over the medium term are:

1. Integration of emerging market labor into the global economy, with rapid growth in working-age populations and average incomes, leading to the development of large urban consumer markets. In fact, in our view, enhanced emerging market labor supply into the global economy is the most important determinant of the current global boom – much more important than demand side factors, such as home-equity withdrawal in the US or easy money policy from the Fed.

2. A continued boom in infrastructure construction and buy brics money energy demand in the emerging world and, hence, further gains in commodity prices relative to manufactured goods prices over the cycle.

3. Further reductions in external debt burdens and the trend of real exchange rate appreciation over the cycle, versus developed country peers.

4. Increased household and corporate sector leverage, and the development of capital markets including mortgage markets, pension systems and liquid local currency yield curves.

5. Further global industrial and services sector consolidation, characterized by emerging market companies playing an enhanced role in industry leadership.

There is clearly still some space for profiting with Brazilian securities, comparing P/E to that of other countries. We continue to be believe in a 2007 re-acceleration in global growth. Main risks to our benign scenario for equities include the potential escalation of geopolitical tensions, a collapse of the USD, a sharp rise in US treasury yields and sudden widening of corporate debt spreads.

The Emerging Markets Bond Index Plus (EMBI+) tracks total returns for traded external debt instruments in the emerging markets. The instruments include external currencydenominated Brady bonds, loans and Eurobonds, as well as U.S. Dollar local market instruments. There is clearly still some space for profiting with Brazilian securities, comparing P/E to that of other countries. Brazil is currently rated BB+ but we think it will be considered investment grade in 2008/2009.

One could invest in the country directly through ADRs traded on the NYSE or through the Brazilian Exchange Traded Fund. Some of biggest Brazilian ADRs are: