Few investing concepts have been as catchy as BRIC, the acronym for the cluster of leading emerging market countries Brazil, Russia, India and China. When Goldman Sachs coined the term in November 2001, it predicted the BRIC nations would contribute more than 10% to the global gross domestic product by decade's end. By November 2007, they accounted for 15%.

And each country's equity markets produced eye-popping returns during that period-Brazil returned 369%; India, 499%; and Russia, 630%. Chinese "H" shares traded in Hong Kong returned 817%, according to Goldman Sachs.

But the BRICs crumbled last year as markets tanked worldwide. The slide continued into early 2009, but then these nations regained their mojo in the global rally that began in early March. The iShares MSCI BRIC Index fund, for example, zoomed 48% through the end of May.

BRICs are back, but not necessarily badder than ever. Two of the countries expect to see slower growth rates this year, and the other two face economic contractions. And each member faces its own assorted challenges and opportunities. What's more, some strategists see BRIC as a passé concept that's not the best way to play emerging markets.

"BRIC is more justifiable as a journalistic concept than as an investing concept," says Milton Ezrati, senior economist and marketing strategist at Lord Abbett. "Why limit your diversification?" Latin America is more than just Brazil, he says. There are also solid markets in Chile and Mexico. And Asia has numerous markets to invest in beyond China and India.

But others still buy into the BRIC story. "They are the foremost emerging market countries no matter how you stack it," says Uri Landesman, head of global growth strategies at ING Investment Management.

More Than The Big Two
Many people see Brazil as a commodity export story. At least investors in the iShares MSCI Brazil Index fund might see it that way, since almost 40% of the fund is represented by just two companies--state-controlled oil company Petroleo Brasileiro (Petrobras) and iron ore mining giant Companhia Vale Do Rio Doce (Vale). That type of concentrated risk hurt the fund last year, dragging it down by 56% when these two companies got hammered by the global recession.

The overall Brazilian market dropped 42% last year. Industrial production fell 14.5%, and falling exports created the country's first trade deficit in eight years. In 2009, International Monetary Fund forecasts call for GDP contraction of 1.3%, down from last year's 5% growth rate.

Nonetheless, some people think Brazil is a great long-term story with the vast potential of its domestic economy. Its exports represent only about 13% of the economy, the country is self-sufficient in food and fuel, and it's a net creditor to the world.
Ezrati says Brazil has launched stimulus programs of tax cuts and industrial support, while the central bank has held steady with the benchmark interest rate at 13.75%. It's a high rate, but he says it signals Brazil's intent not to resort to the inflation financing that plagued the economy in the past.

On the consumer side, sales of white goods and electronics have grown at a compound annual growth rate of 45% since 2003. "Brazil is a very diverse and dynamic domestic economy where the real story is the emergence of the consumer middle class," says David Riedel, founder of Riedel Research Group, an independent equity research firm focused on emerging markets. "That provides immense opportunity."

And of course, its exports of iron ore, soybeans, sugar and coffee will benefit from an upturn in the global economy.

Landesman has taken big positions in Petrobras, which in the past couple of years has found huge deep-water reserves off the Brazilian coast that could someday transform the country into a major oil producer. He also likes Cosan, a leading global producer of sugar and ethanol, and Banco Bradesco, a leading private-sector bank.

The Russian Bear (Market)
Russia, as is its wont, is a conundrum. "I think BRIC is misleading in several ways," Riedel says. "First, the inclusion of Russia in there is totally inappropriate. One of the main reasons to invest in emerging markets is to take advantage of large, young populations where nascent business opportunities and business models can result in hypergrowth. When you have these things, you can get an outsized return on investment.

"Russia basically has none of those things going for it," he continues. "When you buy Russia you're buying into a population that's shrinking and where life expectancy is falling, and into an economy that's dominated by energy."

As the world's second-largest oil exporter behind Saudi Arabia, Russia was awash in rubles as oil prices soared to nosebleed heights by mid-2008. The global economic boom created huge demand for its vast trove of metals and minerals, too.

But then the worldwide meltdown devastated Russia's commodities export-heavy economy. Industrial production fell by almost 60%, the ruble fell roughly 45% against the dollar, and the country had to dig deep into its foreign reserves (much of which came from commodity exports) to support its currency. Meanwhile, the Russian equity markets plummeted roughly 70%, far outpacing the average global decline of 45%.

And the ham-handed Russian government hasn't helped matters. Its invasion of Georgia last summer, its continued interference with its gas supplies to Europe and the chronic meddling in its own domestic economy make Russia a geopolitical loose cannon and an unreliable economic partner.

"I think what we have in Russia is strictly a reflection of oil prices," Ezrati says. "There are many other ways to be long on oil rather than doing it with a less-than-honest regime." He, like many observers, believes Russia has done a poor job diversifying its economy from a reliance on oil, gas and other commodity exports.

Others are more bullish, even if the country's GDP is forecast to fall nearly 6% this year, down from last year's growth rate of 5.6%. "Yes, commodity exports have been a boon to the Russian economy, but there are also significant exports of machinery and equipment, in addition to consumer goods to neighboring countries," says Mark Mobius, head of Templeton Asset Management's emerging markets group. "Domestic demand in the economy still represents a larger part-over 50%-of the GDP."

Mobius also cites the Russian market's valuation--at a recent price-to-earnings multiple of less than 6 times trailing earnings--as a selling point. That's less than half the multiple of the Brazilian and Chinese markets, as well as that of the overall MSCI emerging markets index.

And the country has benefited from rising commodity prices in recent months, which helps explain why Russia's RTS equity benchmark index had zoomed more than 60% this year through May. That propelled the Market Vectors Russia ETF to a whopping 77% gain through May, a spectacular performance tempered by the realization that the fund lost nearly 74% in 2008.

Huge Middle Class
Within the BRICs, India is often compared to China. Whereas China has been growing about 10% annually, India has clocked in at 9% in recent years. And while both Asian neighbors have more than 1 billion people, India's rapid growth will make it larger in the not-so-distant future. And its young population, coupled with a growing middle class, make some people think that it could be the next China.

In reality, though, India still has some catching up to do. It needs to make a ton of infrastructure improvements to alleviate bottlenecks to economic growth. The government is trying to address this with a stimulus package of assorted tax breaks and pump-priming spending that amounts to more than 4% of GDP. And the country's messy democracy lacks the strong hand of a country like China that would enable it to ram through its economic agenda.

"A lot of people think of India as IT outsourcing, pharmaceuticals, gems and things like that," says Anupam Ghose, a partner at Indus Advisors, developer of the index underpinning the PowerShares India Portfolio fund. "Exports are a significant part of the story, but domestic consumption makes up 68% of GDP."

And a big driver of domestic consumption is the rising middle class, which is estimated at between 250 million to 400 million people. "Given the young population, that's a lot of people consuming on this scale for the first time," Ghose says.

India's stunning growth in recent years has created high valuations that worry some investors. Indeed, the country's pricey markets were pegged as a red flag even before the markets crashed last year. Its benchmark Sensex index fell 52% in 2008, as economic growth had slowed to 7% from 9% the prior year. This year through May, the Sensex was up 50%. By one measure, the market was recently valued at about 17 times trailing earnings-by far the highest valuation among the BRICs, even though the growth rate is expected to fall less than 5%.

But India's national election in mid-May gave investors a positive jolt with the surprisingly overwhelming victory by the pro-business Congress Party, which previously maintained power through a coalition with communists who frequently blocked its economic initiatives. Now armed with a clear mandate to govern on its own, the party should have a freer hand to enact its economic programs, such as selling more state-owned assets to raise needed cash and help bring down expanding deficits.

Only 8% Growth?
During a trip earlier this year to Guangdong province, China's export hub, fund manager Richard Gao stayed in a hotel that used to bustle with foreign businesspeople. "There were only about five or six people there this time," says Gao, lead manager of the Matthews China fund. "It was kind of scary."

The empty hotel was a metaphor for the state of China's export economy, long a key cog in the country's growth engine. According to one published report, export growth in Guangdong-located along the country's southern coast and home to scores of low-priced manufacturers-fell to 5.6% last year from 22.3% in 2007 in response to falling worldwide demand for goods. Rising unemployment loomed as thousands of Chinese workers lost their manufacturing jobs and returned to their rural heartland homes with no work and few prospects.

China's GDP tumbled last year, growing at "only" 9% after a quarter-century or so of average annual double-digit growth. In turn, Chinese financial markets nose-dived-the Shanghai Composite of A shares (open only to domestic investors and a limited number of qualified foreign institutional investors) plunged 65%; Hong Kong-listed H shares sank 48%.

Still, China increasingly is the straw that stirs the global economic drink, and it gave the glass a big twirl last November when it unveiled a two-year, $586 billion stimulus program aimed at boosting its domestic economy and avoiding a global recession.

Among other things, the plan targets low-income housing, rural infrastructure, roads, railways and airports. It also addresses health care and social welfare, and provides companies with a tax deduction for capital spending.

Economists estimate the plan could add two percentage points to China's projected GDP growth rate of 6.5% this year. That
would be in line with the government's forecast growth rate of 8%, which is still low by recent standards.

Meanwhile, China's exports were down 21% for the first four months from the same period last year. "Domestic consumption in China cannot offset the export sector weakness immediately and completely," Mobius says, "but it will have a significant impact particularly in view of the aggressive efforts by the government to boost demand."

One positive indicator, Mobius adds, is that bank lending jumped 188% for the first four months over last year's period. "This should be more than sufficient to give a major boost to domestic consumption," he says.

Through May, the Shanghai Composite had jumped roughly 45% and H shares on the Hang Seng index gained about 25%.
Gao says he sees signs of growing property transaction volume and stabilizing property prices, as well as recoveries in airline traffic and in supermarket and department store sales. His fund is overweight in sectors that play to the domestic theme-consumer discretionary, consumer staples and financials, including banks and property companies.

Among the U.S.-listed Chinese stocks Gao likes are China Life, the country's largest insurer with roughly half of the market. Another is NetEase, which makes products for China's fast-growing online gaming industry and also runs one of the country's most popular Web portals, a source of online ad revenue.

Emerging Opportunities
Among the BRICs, Riedel gives a slight nod to Brazil. Nonetheless, his top pick among emerging markets is Indonesia. Either way, he thinks indexes aren't the best way to invest in emerging markets because they tend to miss the smaller companies geared more toward the domestic opportunities in these countries.

Many observers believe emerging markets are the place to be right now, whether or not the BRICs are the best way to play them. GMO co-founder and noted market bear Jeremy Grantham recently called emerging markets "the only game in town." (That is, he cautioned, until they become the next big bubble.)

And one of the overlooked aspects in this space is fixed income. "On a longer-term basis, the return on emerging market debt is actually better than the return on emerging market equities," says Howard Booth, portfolio manager of the MainStay Global High Income fund. He adds that average annualized returns on the debt side were 9.6% from 1994 through late May 2009, versus 3.8% for equities.

Recently, Brazil was the fund's largest single-country holding (10.6%), and Russia was the seventh-largest holding (5.3%). Booth likes Brazil's diversified economy, stable inflation and attractive local currency. Recently, some of this local Brazilian paper was yielding between 10% and 11%.

And despite Russia's financial problems during the past year, he sees glimmers of hope--especially if commodities maintain strength.

Last year drummed home the point that BRICs--and emerging markets as a whole--aren't for the faint of heart. "With BRICs, it's always a case of high risk and high reward," says Uri Landesman from ING. "Always."