The State of Play

China's economic miracle is well documented with the world's most populous nation dragging its economy into the 21st century in mind-bogglingly quick time. An authoritarian state with a strong grip on its command economy has, of course, enabled this process to be so rapid and, from afar, the hybrid command/market economy appears to be working well.

Pulling so many of its people out of poverty has created a burgeoning consumer class and prompted rapid urbanisation. But, compared with the west, the Chinese consumer remains largely debt-free – in fact, Chinese consumers have the reputation of being prodigious savers. This has caused some problems of late, though, as domestic consumption has been a victim of rising caution among consumers. The government responded with a huge stimulus package ploughing billions of dollars into infrastructure projects, shoring up growth rates around the 8 per cent level.

There are concerns that the ploughing of funds into construction could reflate the property asset bubble in China and also that a prolonged recession in the developed world could eventually tell on its economy should exports remain depressed. But the US now accounts for less than 10 per cent of China’s exports as the growing maturity of its fellow emerging markets economies has taken up some of the strain. Also, recent signs of internal strife in Tibet and Xinjiang have led to questions about the government's ability to control such a vast country and populace as affluence is delivered in an uneven manner.

India

BULL POINTS:

■ Growing, young population

■ Well educated and English speaking

■ Rapid growth of middle classes

BEAR POINTS:

■ Democratic system means slower policy changes

The world's second most populous country still has some way to go to catch up with its major Asian rival, China, but its young and rapidly growing population, coupled with abundant natural resources give India two vital ingredients with which to achieve this. Growth rates are a little more subdued, forecast to be anywhere from 5 to 8 per cent this year. This in some way reflects the fact that India is a democracy and major changes to the economy are less easily enacted than in China.

But the strong mandate handed to India's coalition of the Congress Party, led by Manmohan Singh, should bode well for economic reform over the coming years. India has a young and relatively well-educated workforce that has allowed it to become a global centre for business process outsourcing, particularly for the English-speaking world. But its domestic economy is also rapidly maturing as its middle classes grow.

Brazil

BULL POINTS:

■ Resource rich

■ Rapidly growing consumer class

■ Reduced dependence on North America for trade

BEAR POINTS:

■ China is biggest single trading partner at 12 per cent of exports

Brazil is rich in natural resources, both hard commodities such as iron ore and oil, and soft commodities produced by its booming agrarian sector. With a population of 180m, it dominates the Latin American economy, but it has become a true emerging global player in recent years through its export-led growth, with China, its biggest trading partner, accounting for 12 per cent of Brazil's exports. Furthermore, the domestic consumer is becoming more and more important as the economy grows.

For many years Brazil was enfeebled by political problems and huge budget deficits. But several years as a settled democracy has seen it rebuild its economy to the point where it is now running a fiscal surplus and GDP is forecast to grow at around 4.5 per cent next year, according to JPMorgan.

Russia

BULL POINTS:

■ Huge natural resources reserves

■ Proximity to European markets

■ Consumer class growing

BEAR POINTS:

■ Demographics

■ Corporate governance worries

Russia is the enigma of the emerging markets 'big four'. It has enviable natural resources in terms of oil and gas and its sheer physical scale gives it close proximity to both the developed markets of Europe and the emerging market powerhouse that is China. Yet, despite its natural advantages, doing business in Russia for an outsider has been fraught with problems.

Domestically, the Russian economy is maturing to the point where it will soon be Europe's largest single consumer market but consumer debt remains comparatively low compared with the developed world as does government debt with a budget deficit of around 6 per cent, roughly half that of the UK.

Russia, for now, is a play on the health of the world economy with its heavy exposure to oil and gas. But it faces problems with its demographics. Russia's population is declining as deaths outpace births and, over the longer term, this could hamper its growth prospects.

Frontier market stars

Beyond the BRIC economies

Some commentators have begun to argue that investing in the BRIC economies is no longer real frontier emerging markets investment and that these countries have effectively 'emerged' already.

However, investing in emerging economies such as Vietnam, Thailand, Indonesia, Egypt, Turkey, sub-Saharan Africa and Latin American economies such as Peru, Chile and Bolivia is fraught with significant risk. Economic systems are less developed, companies less sophisticated, corporate governance less refined and growth more unpredictable. Of course, emerging markets fund managers can and do invest in such markets and sometimes with significant success.

Mark Mobius of Templeton is currently keen on countries such as Turkey, South Africa, Mexico, Chile, Korea, Taiwan and Thailand, and is expecting countries such as Egypt, Kenya and Nigeria to be potentially interesting markets in the years to come.

One region that took a hammering during the recent economic crises was 'emerging Europe', the former satellite states of the Soviet Union and beyond, many of whom found their economies hit hard by the rapid slowdown in the European economy.

But Invesco Perpetual's Emerging Europe fund manager, Liesbeth Rubinstein, believes the region is still the cheapest in terms of its average price to earnings ratio of eight to nine times. She says emerging Europe has the benefit of "a huge natural resources endowment and human resource endowment", and that the lessons of the past 10 years have been learnt with government policies and policy-makers getting to grips with their economies. Furthermore, there is good domestic demand and government deficits are low compared with more developed regions. Having been the poor cousin of emerging markets investing during the economic crisis, emerging Europe arguably has the potential to continue bouncing back strongly.

BRIC outperformance