Paying impressive homage to Jim O?Neill, the Goldman Sachs strategist who coined the BRIC acronym, Brazil, Russia, India and China this week convene their first summit. The event is obviously a significant positive, not least because it has proven so difficult for these nations to even sit down together, let alone agree on common interests.

The BRIC nations were targeted by O?Neill as their economies have the potential to exceed those of many of the world?s developed nations by the middle of this century. Indeed, since the acronym was first applied back in 2001, the block?s growth has well exceeded expectations; and now, in recessionary times, its aggregate growth remains healthy relative to that of the global economy.

Chart 1: MSCI BRIC Indexes

Structural Growth Continues

Ostensibly, the BRIC nations fit well together as India and China are population in intensive economies with huge resource demand, while Brazil and Russia are resource intensive nations with raw materials to sell. But, to some extent, the BRIC label is misleading. Trade between these countries is improving, but it remains relatively low, while each of these countries has major international trade relationships with other regions.

Emerging, At Last

The world is marching swiftly toward a new multi-polarity. The basis of this change will be the elimination of global imbalances that subsidised industrialisation, but created much global economic instability.

European nations ended their pegs (formed under the post-war Bretton Woods agreement) with the dollar back in the 1970s, but the emerging nations ? notably China and the Middle East ? have been less willing to liberalise their exchange rates.

To some extent, this is understandable: These nations only began their industrialisation around the time that European nations ceased to require FX subsidisation. Yet, the US had already seen a structural shift limiting its global competitiveness when Bretton Woods broke down. Pegging to the dollar post Bretton Woods was arguably a suboptimal strategy from a global growth perspective.

Of course, the development of emerging markets has also been hampered by periodic economic and financial crises, caused by combinations of poor economic management and broader economic circumstance. But today, with the US economy committed to a fundamental overhaul, the BRIC nations recognise a growing need to step up as global economic participants.

Multipolarity

The 21st century economic structure is coming into view over the horizon. Key details are unresolved, not least as the future role of financial services remains unclear. But, the trends are now perceptible. The dollar is not about to fail as a reserve currency, but the US can be expected to cease cross-subsidising industrialising nations. As a result, economic development will regionalise and diversify. This is a big positive for sustainable investment returns.

It also demonstrates the need for clearer communications between BRIC nations. These countries have huge scope to increase their trade, and ? if they can find common ground ? to influence global politics. But, they do not automatically fall into a single and simple group. Indeed, their overlapping interests explain in large part why it has taken so long for them to even sit down together. Whatever the headlines this week, improved communications will likely be the key achievement of this first summit.

Need For Improved Governance

In large part, the recent success of BRIC economies has been down to better economic management. Most emerging markets have learned the lessons of the 1990s and fiscal responsibility is the consequence. Of course, amassing structural reserves was easy in the goldilocks years, but the scale of improvement is sufficient to provide stability even during this major economic upheaval ? a great achievement.

Chart 2: 2007 Current Account Data, $ Bln

Emerging Fiscal Prudence, Shifting Risk

It would be na?ve to view the world through rose-tinted glasses though, not everything has changed and all emerging nations have a great economic management gap to close. Russia best demonstrates this with its costly dependence on commodity revenue.

Beyond that, environmental implications cannot be ignored. As the latest Economist journal points out, Russia and China (along with the Brazilians themselves) are major consumers of Brazilian beef grown on deforested land. At the same time as the world?s carbon sinks rapidly disappear, pollution capacity (such as car ownership) continues to soar.

The reality is unavoidable: while demanding greater say in defining global economic policies, emerging markets need to accept greater responsibility for prudent, transparent and responsible economic management.

Investment Opportunity

That the BRIC nations do not fall into a single and simple block is well demonstrated by their relative financial market and economic performances. While analysts are raising and reaffirming their strong growth (2009 GDP +8%) outlook for China, Brazil has slipped into recessionary territory (albeit with a relatively mild -3% downturn).

India, arguably the least interconnected of the four, continues to grow well, with 1Q09 growth of 5.8%. But Russia is setting a standard for recession with 1Q09 growth recently downgraded to -9.8%, and year-end growth likely to remain significantly negative even if oil prices hold at today?s elevated levels.

Such economic diversification is a great attraction for international investors. The BRIC group spans a broad range of investment circumstances and drivers. The block?s trade positions are also cause for optimism.

Certainly current account balances will change going forward as the US is no longer able to subsidise global industrialisation. But, Brazil, India and China have the potential to increase domestic demand and sustain their own growth without running structural deficits. (Russia faces more substantial structural hurdles, but presents enormous opportunity if it can achieve real change.)

Meanwhile, developed nations are facing enormous debt expansion and their growth potential is more limited. In fact, they now depend on emerging market stability and openness as sources of economic expansion. The implications for global risk exposure are significant. Emerging capital markets will remain volatile and relatively thin, but capital is rapidly flowing from developed to emerging markets in recognition of relative growth and yield potential.

Over the coming years, emerging market currencies are likely to substantially outperform the dollar, and emerging market borrowing costs are likely to decline. Debt spreads (see Chart 3) have improved sharply this year. Their current levels remain high, but this is largely due to artificially low yields in developed markets. Going forward, emerging markets can expect to borrow at far more attractive prices relative to their developed world peers.

Chart 3: EMBI (Emerging Market Bond Spreads)

Artificially High, Due to Suppressed Treasuries?