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The tectonic shift to BRIC nations

Thursday, April 15, 2010


The industrialized world, led by the U.S., brought on the recession and paid the steepest economic penalty as a result (see my article on fading U.S. dominance for more background). But because of the differences in regional economies, emerging nations such as Brazil, India, China and to some extent Russia (collectively known as the “BRIC” nations) were largely unaffected by the recession. Their banks mostly avoided the toxic assets that nearly brought down the Western financial system, and they were hurt only by reductions in exports to the West.

The emerging nations all have large populations and economies that are growing much faster than the old G8 countries. Collectively they are leading the world out of the recession. Some of these nations have seen gross domestic product (GDP) grow 5% to 8% per year for 10 years, while we in the West hope for growth of 2% to 3%.

Twenty years ago, the bicycle was the most common mode of transportation for people in China. For the past five to 10 years, the Chinese have been building massive highways. And in 2009, they also bought more cars than the Americans, for the first time since the automobile was invented. China’s economy has been the dominant player by far in the metals and mineral market for 10 years.

India has also made huge economic strides, and the phenomenon of U.S. outsourcing of both service and industrial jobs to India has helped boost its economy. Indians are also buying (and producing) cars at an increasing rate.

The economies of Russia and Brazil haven’t had the impact that China and India have had, but their growth can’t be overlooked either. Canada’s economy was once far larger than Brazil’s and Russia’s even though Brazil has close to 200 million people and Russia about 140 million. Both have both recently surpassed us in recent years. When you have such large populations, a small improvement in GDP per capita can make a huge difference.

My biggest concern is that the BRIC countries and their combined populations of 2.8 billion people are moving closer to North American/European lifestyles, and the world simply does not have the resources to make this happen. As more and more of BRIC citizens move into the equivalent of a North American middle-class lifestyle, the pressure on the demand side will increase dramatically, and prices will move up accordingly.

Even if the proportionate percentage of vehicles on the road in China and India is similar to a country like Mexico (which is far behind Canada and the U.S.), the strain on oil supply would be tremendous. I do not believe crude oil output can rise too much more, because most of the easy oil has been found already. New discoveries are smaller and more expensive to develop, barely replacing what is coming offstream, let alone adding significant barrels per day to world supply.

We all know what happens when supply is stagnant and demand increases dramatically: prices rise. This won’t happen overnight, but it will happen. The old G8 nations will move more rapidly towards hybrids and other newer, more environmentally friendly methods of transportation, but this will take time and won’t offset the millions of new drivers in BRIC nations.

The events shaping our post-recession world have substantial impact on investment portfolios. We need to be aware of these changes and alter the way we invest if we wish to participate in the opportunities that will arise from the economic shift away from the industrialized West to the BRIC nations.

In my next column, I will outline some steps you can take to profit from these tectonic shifts.

 

 

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