Fixed-income investors are betting on rapidly expanding emerging markets, more notably BRIC (Brazil, Russia, India and China) countries and their related exchange traded funds (ETFs), over more developed economies that are still struggling with budget deficits and slow growth.
The average cost of contracts protecting debt of BRICs decreased 41.4 basis points more than price of swaps for G7 countries, with swaps trading at a record low last week, report Abigail Moses and Shannon D. Harrington for Bloomberg. A record $40.5 billion, or more than four times the full-year high of $9.7 billion in 2005, has found its way into emerging-market sovereign debt this year. [BRIC ETFs Hot, Developed Markets Not.]
The International Monetary Fund (IMF) projects that emerging economies will grow 6.4% next year, as compared to 2.2% growth for developed economies.
Mikhail Foux, a credit strategist at Citigroup, attributes emerging markets’ attractiveness to their low debt, quick growth, large reserves of natural resources, the increasing price of commodities and good population demographics.
The success of the BRIC countries can be traced back to economic reforms that were focused on “more market” and “less state,” writes Markus Jaeger for Commodities Now. The recent global crisis has also strengthened the idea that the “Beijing consensus,” or the greater role the state has in economic development as can be seen in state ownership in sectors deemed strategically vital, control over credit, “national champions” and investment funds.
Brazil’s next government will likely achieve a more active industrial and financial policy, with the state playing a greater role in select sectors. In Russia, while major sectors are still state-owned, smaller stakes in “national champions” will begin to be privatized. Lastly, India won’t be reducing its state involvement any time soon, either.
For more information on BRIC countries, visit our BRICs category.
- SPDR S&P BRIC 40 ETF (NYSEArca: BIK)
- iShares MSCI BRIC Index (NYSEArca: BKF)
- Guggenheim BRIC (NYSEArca: EEB)
- Direxion Daily BRIC Bull 2x Shares (NYSEArca: BRIL)
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.