Profit From the Fantastic Four

In 2001, the clever folks at Goldman Sachs coined a new acronym: BRIC. BRIC stands for Brazil, Russia, India, China -- the four colossi of the developing world. BRIC is a marketing slogan, but it's one that captures the imagination and simplifies the investment story in emerging markets.

As if on cue, the BRIC economies have gone from strength to strength this decade. Their stock markets have dazzled. The four giants now represent 45% of the entire market value of the MSCI Emerging Markets index.

Over the past five years, the four countries have generated the bulk of world economic growth. Goldman Sachs projects that the BRICs, collectively, will surpass the scale of the U.S. economy sometime around 2025. From energy to metals and grains, growth in the BRICs is driving global commodity markets.

The four countries are, of course, utterly different in terms of geography, culture, strengths and weaknesses. But from an investor's perspective, there is logic in addressing them together. For instance, Russia and Brazil are both massive exporters of natural resources, and together they complement China and India, two enormous net importers of commodities.

Moreover, emerging markets, as symbolized by the BRICs, are where the growth will be over the next decade. For instance, while glutted Americans are drowning in consumer debt, consumers in the four BRIC nations have borrowed relatively little. Rapidly expanding middle classes, strengthening currencies and rising consumer banking ensure that it's still morning for BRIC consumers.

Get set for a tour of the four BRIC members. We'll point out some of their economic strengths and weaknesses and identify investment opportunities.

More than Samba

Brazil is hot. It's easy to forget that this nation suffered from hyperinflation in the 1990s and seemed on the brink of defaulting on its debt earlier this decade. Now, foreign direct investment pours in and the stock market and currency have handsomely rewarded foreign investors. On April 30, Standard & Poor's bestowed an investment-grade rating on Brazil's foreign debt.

The country now benefits from a virtuous cycle. The government's skilled management of fiscal and monetary policy broke the back of inflation and restored confidence in the nation's currency, the real. Budget deficits have given way to surpluses. Interest rates have responded, tumbling from 27% in October 2003 to 11% today. Investment and consumer spending are robust.

Booming exports are generating large trade surpluses. Sun- and water-kissed Brazil has become an agribusiness giant, exporting a cornucopia of soybeans, sugar, coffee, orange juice, beef and chicken to a hungry world. The country is a major exporter of iron ore and other minerals, and, after some major recent offshore-oil discoveries, it seems the lucky country is rich in hydrocarbon reserves, too. "Brazil is firing on all cylinders," says Thomas Melendez, who manages MFS International Diversification fund.

Brazil scores well among the BRICs because it combines solid economic leadership with strong management and governance at the corporate level. Seasoned emerging-markets portfolio managers, such as Mark Gordon-James, of Aberdeen Emerging Markets, rank Brazil behind India but well ahead of China and Russia in terms of the number of attractive companies available for investment.

For instance, Vale (symbol RIO), a mining company, earns high marks for quality management. Steel companies around the globe snap up its iron ore. A series of offshore-oil finds has made Petrobras ( PBR) one of the few major integrated oil companies with bright prospects for volume growth.