Saturday, April 23, 2011

BRIC Nations Add New Member

By Sara Nunnaly
In mid-March, we heard from Smart Investing Daily reader C.L.V. who asked if South Africa should be considered part of the emerging market bloc of nations known as BRIC -- Brazil, Russia, India and China.
I outlined some of the differences between South Africa and the BRIC nations, and concluded that from my perspective, South Africa should not be considered part of the BRIC bloc. Well, earlier this week, C.L.V. wrote in again to ask for our perspective on the recent gathering of BRIC nations...
And I might have to eat my words.
From Forbes:
Thursday's [April 14] BRICS Summit will likely focus on what the big emerging markets can do about high commodity prices, finalized by the usual joint statement on global governance signed by the nations' leaders. It'll be their third meeting. With each passing year, the ad-hoc group gets stronger economically and politically in world affairs.
It's a motley crew, indeed, that's going to meet Thursday in the south China resort city of Sanya. Brazil, Russia, India, China -- and newcomer South Africa -- are as diverse economically as they are culturally.
The group of BRIC nations invited South Africa to join their group late last year, and after their meeting last week, put out a statement in support of closer cooperation on things like food security and other commodity production.
Smart Investing Daily reader C.L.V. asks, "Who came out with what at the just ended BRIC gathering? Could you please break it down to the point of what its effects would have on global investments and its volumes? How is this going to affect the African, North American and European (ex UK) blocs?"
This is a massive question that will take far more than one Smart Investing Daily article to answer, but let's start with an overview of what was talked about at the BRICS summit.
In brief, China and India agreed to reestablish defense ties and initiate closer border cooperation. China also agreed to deepen its "strategic partnership" with Russia, but there hasn't been much elaboration on any specifics of this partnership. A Russian bank speaking at a financial forum held during (but separate from) the BRICS Summit hinted that it is considering issuing bonds denominated in yuan, selling them in Hong Kong.
The joint statements released after the summit point to continued exploration of nuclear power plants as part of an overall energy portfolio needed to support industrial growth.
They also announced an agreement to open lines of credit in their national currencies in order to dilute their overreliance on the U.S. dollar.
In my opinion, the biggest thing to come out of the summit was BRIC access to Africa via its newest member, South Africa. China and India already have a huge presence on the continent, and expanding ties with Africa's largest economy -- though beneficial to South Africa itself -- could be more of a boon to BRIC nations in search of vast new quantities of commodities.
China's been buying up interests in uranium projects in Namibia, along with shares of companies, over the past three years and more. China's also been involved in oil exploration in Sudan. Russia has been trying toget into the oil markets in Angola and Nigeria.
India is China's closest rival in the amount of investment it's been doing in Africa, which is an interesting relationship, considering the history of Gandhi and South Africa. Just before the global financial crisis hit, India lost some lucrative oil contracts to China.
And in early 2010, Brazil's Vale S.A. (VALE:NYSE) announced it would expand into Mozambique. But trade between Brazil and Africa has seen huge growth. Between 2000 and 2008, trade jumped from $3 billion to $18.5 billion.
The BRIC nations will gain most from this new partnership with South Africa, certainly.
But here's another aspect of the BRICS joining economic forces...
The group -- including South Africa -- accounts for over 40% of the world's population, but only 18% of its GDP in 2010. But this could change very rapidly, even if South Africa isn't included.
The IMF says that BRIC nations will account for 21.6% of the world's GDP by 2015. A significant increase, but it could be just the tip of the iceberg. The International Business Times reports that BRIC nations are expected to represent 47% of the world's GDP by 2030.
That's huge growth, though investors should take it with a grain of sand -- the research came from the China Center for International Economic Exchanges.
And yet, the fastest growth we've seen has come from BRIC nations as developed economies continue to struggle into recovery mode.
From an investment standpoint, we could see a number of BRIC-based companies make forays into Africa, and as commodity prices continue to rise, even smaller projects could be profitable -- or at least "purchase-able."
Continue to look for China to snap up bits and pieces of key energy projects, and keep an ear to the ground for any Russian interest in oil exploration.
But be careful -- the smaller projects can change hands pretty quickly, so you might want to consider these types of investments highly risky. A quick Internet search will bring up tons of information on specific mining and exploration projects and who's involved, so it might be tempting to see these projects as bigger than they really are.
BRIC countries will shoulder out Western companies of some concessions, but we don't quite know yet how that would affect access to sought-after commodities.
Again, this topic is far too complex to break down in a single article, and we'll more than likely come back to this issue as investment perspectives come into play.
Overall, to me, it makes sense that BRIC nations are inviting South Africa into their group... It's a big stepping-stone into the continent. From a strict economically based perspective, I just don't get it.

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