Time to Take the "Emerging" Out of Emerging Markets

This article published with permission from InvestmentU.com.

Ten years ago, while working in Goldman Sachs Group’s economic research department, Jim O’Neill wrote a paper predicting that, by 2050, Brazil, Russia, India and China would be richer and more powerful than most of the world’s current major economic powers. He was first to coin the BRIC acronym that refers to those emerging-market nations.

“Growth markets”

Last week, in a speech at the Confederation of British Industry’s employers’ conference in London, Mr. O’Neill stated that it was now time to stop categorizing some of these nations as “emerging.” Over the past decade, O’Neill said that China alone saw its gross domestic product rise by over $5 trillion. “The phrase I use is growth markets,” he said.

China gets a lot of attention, but it’s not the only BRIC that has probably outgrown the acronym. Over the past few years, Brazil has seen itself placed into the spotlight due to a burgeoning economy and dynamic growth trajectory. The country’s GDP is predicted to total $2.4 trillion for this year.

I think the term “emerging market” comes with a stigma to some investors. Since O’Neill made the statement, let’s look at Brazil and other BRIC nations versus Great Britain — which at the end of this year Brazil will overtake as the world’s sixth-largest economy.

Ten years ago, the British economy was $1.5 trillion larger than that of China, and the aggregate size of the economies of the four BRIC nations was less than $3 trillion. The present day British GDP is approximately $2.6 trillion, while Brazil, Russia, India and China have an aggregate GDP of $13.5 trillion.

Over the course of the last decade, the BRIC nations have effectively created the equivalent of close to five new British economies, O’Neill said.

Oil will be key to Brazil’s future

Sometimes it’s better to be lucky. Four years ago, Brazil discovered vast oil fields off the coast of Rio de Janeiro, which became known locally as the “pre-sal” — a translation of pre-salt.

Brazil’s National Petroleum Agency estimated that nearly 50 billion barrels of oil have been identified to date, which makes the find the greatest oil discovery in the country’s history. This may put the country into the top-five category of the world’s oil producers.

Going forward, the most important aspect of Brazil’s new oil industry is the Brazilian government’s pledged to use its oil revenue to revamp the country’s public school and health care systems and give a big boost to the country’s failing infrastructure.

According to Gustavo Mendonça, an economist at the management firm Oren Investimentos in Rio, “If we go in the right direction, we’ll be a richer country, with one of the biggest oil service industries in the world, a more highly skilled labor force and a more educated and healthier population. In summary: We’ll be much more productive than we are, not only in oil, but as a country.”

Playing Brazil’s growth

For the last few months we have talked about plays in Brazil for the aforementioned reasons and two more.

The Institute of Applied Economic Research — a Brazilian government-led research organization dedicated to the generation of macro-economical, sectorial and thematic studies — reported in September that Brazil stands to be a major destination for foreign investment in 2012.

Also, Brazilian stocks are trading at lows due to the European crisis.

With so much emphasis on the oil industry, you may want to look at offshore drilling company Petrobras (NYSE: PBR). In September, the company opened the Lula-Mexilhao pipeline, which in the future will pump 10 million cubic meters of natural gas daily.

Jason Jenkins is a part of the research team at InvestmentU.com. See more articles by Jason here.