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Building BRICS?
New York: October 26, 2009
By John Stephenson

Lately, the spotlight has been on Asia and its strong and resilient growth that is driving the bus on the global economic recovery. Ben Bernanke made mention of this fact last week in San Francisco saying; “ Asia appears to be leading the global economic recovery.” But while China 's economic growth seems assured, is it really wise to assume that all of the so-called BRIC countries— Brazil , Russia , India and China will be calling the economic shots in the future. Probably not!

The whole notion of the BRICs evolved out of some pretty slick marketing by Goldman Sachs, who coined the term in one of their 2003 research reports. Investors loved the idea of thinking of these huge disparate countries as an emerging economic force in the world. Investors reasoned that a promised land of economic opportunity awaited them in the various BRIC countries. In the ensuing marketing maelstrom, fund companies launched a smorgasbord of BRIC funds, hoping to cash in on this catchy new investment trend.

But once you peak behind the curtain and look at the fundamentals that underlie the various countries that make up the BRICs, a tale of vastly different economic prospects emerges. China is clearly the standout economy in the group, powering forward in spite of the global financial crisis, with the most recent annual economic growth of 8.9 percent.

But the global financial collapse has laid bare the fundamental weakness in Russia 's economy, exposing it for what it is—an aging, decaying state, where gangster capitalism is the order of the day. From 2003 to mid 2008, soaring energy prices helped mask the economic problems in Russia . Underpinning the Russian economy is a rustbelt infrastructure and a demographic trend that is in terminal decline.

With the collapse of the Soviet Union and the rise to power of Russia 's first democratically elected president, Russia began a series of ill-fated market reforms. But with the absence of any discernable rules for the process, former state assets were hived off in a series of rigged privatizations to politically well connected thugs. These so-called oligarchs, used their enormous wealth for the fire sale of state assets, to gain further political access and favors in the ensuing years and milked their companies for all that they could.

Today, Russia 's economy has slumped as the stock market has tanked and foreigners have yanked their investment dollars out of Russia . Global energy companies have been abandoning Russia in droves, fearful that their assets could be expropriated. Oil and gas production, the one true bright life in Russia 's commodity-based economy, has been in decline, hobbled by a lack of foreign capital and near-defunct infrastructure.

Russia 's sovereign wealth fund, which is integral to the government's plan of a recentralized economy, is being depleted, and fast. The average age of its citizens at 37.3 years, is the highest of the BRIC countries and their life expectancy at 64.8 years is one of the worst in world.

Already, foreign-policy wonks and savvy investors are rushing to replace Russia in the group of major emerging-market economies. Some have offered other cute acronyms, such as, BRICET, which includes the addition of Eastern Europe and Turkey to the original basket of emerging market economies.

A better addition to the class of emerging market economies is Indonesia , the world's largest Muslim nation and a rising economic power. Indonesia 's middle class is expanding rapidly, and relatively stable democratic politics has made its economic performance a standout during this global economic crisis.

The same is also true for South Korea , a modern, economically progressive country that is churning out sophisticated goods and services at a steady clip. While the specter of unrest on the Korean peninsula is always an issue, with a neighbor like North Korea , this possibility is remote.

Emerging markets are where the growth is likely to be in the months and years that lie ahead. Investors can play the rise of the emerging markets directly through emerging markets index funds, or indirectly through commodities. But for my money, I would advise against blindly buying a BRIC fund, since one of these countries is not like the others.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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