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Net Net: Promoting innovation and managing change

Crumbling BRICs: Why You're Better Off Elsewhere

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The BRIC nations increasingly look like they will no longer be the building blocks of international investing.

As a group, Brazil, Russia, India and China have been seen as the collective pillar of emerging market growth, leading to an exodus of money from U.S. stocks and into global equities.

But signs indicate that trade has begun to run its course, and investors are looking for opportunity elsewhere.

"The BRIC economies have been the brightest stars of the emerging world since the year 2000, contributing nearly two-fifths of global growth. More recently, they have been sources of disappointment," Mark Williams, chief Asia economist at Capital Economics, said in a report for clients.

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Williams pointed to weakness in each of the countries: Debt is dragging on Brazil; Russia's commodities boom is constrained by weak business investment; India's efforts at modernization and open market reform have waned, and China has not succeeded yet in transforming to a consumer-driven economy.

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Investors would be better off focusing elsewhere while each country patches up its weaknesses, Capital said in a separate analysis.

The firm recommends clients find opportunities in sub-Saharan Africa, Southeast Asia, Mexico, Poland and Turkey.

While "these forecasts still point to rapid growth for the BRICs as a whole," that growth "is unlikely to rebound to anything like the rates seen in recent years or to the rates still implied by consensus forecasts," Williams said.

As a result, he added, "much of the excitement about growth in the BRICs will fade."

Investors have been cool overall to the various equity markets within the BRICs,

The Russian stock market has eked out a mild 1.4-percent gain for the year, but China is flat, Indian equities are down about 1 percent and Brazil has tanked, falling more than 7 percent to place it among the worst performers in the world.

In the U.S, meanwhile, the has been above average globally, rising nearly 9 percent.

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Brazilian Growth Is Slowing

The investor and author Jim Rogers offers a scathing takedown of the BRIC theme in his most recent book, "Street Smarts" (Crown Business, 2013).

Rogers writes that Jim O'Neill, the Goldman Sachs strategist who coined the "BRIC" term in 2001, "had no idea what he was talking about."

Rogers dismisses Brazil's prosperity as part of a commodities boom that "like all bull markets will come to an end."

"Basket case" Russia, he said, is "facing the worst of all worlds" with the fading of its oil trade and aging population.

As for India, it "should be one of the more agriculturally productive countries in the world, but government policy prevents that from happening. … The country is hopelessly bound up in bureaucracy as stifling as any in the world, and the government is both corrupt and chronically inept."

China largely escapes doubts from Rogers, who lives in Singapore and advises everyone to learn how to speak Mandarin as China's global influence grows.

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To be sure, not everyone is down on the BRICs.

In a recent compendium regarding emerging market outlooks, Bank of America Merrill Lynch offered a more upbeat analysis.

"The worst is over" in India, according to BofA analyst Indranil Sen Gupta, who expects that growth bottomed in the previous quarter and will expand to 6.2 percent again by 2014.

A separate BofA analysis concedes that the Russian economy is weakening, but looks to rising wages to help reverse the trend.

"We expect persistent consumer income strength to continue, forming a good base for the broader economic recovery later in the year, when consumer strength should be supported by an expected rebound of demand in the key export markets," said BofA's Vladimir Osakovskiy.

In the interim, though, BRICs are likely to weigh on global recovery efforts.

Capital Economics estimates that slowness in the four countries will shave about half a percentage point off the current 4.1 percent projection from the International Monetary Fund.