Bullish on BRIC, not worried of middle income trap: Mobius

Veteran emerging markets investor Mark Mobius feels the BRIC (Brazil, Russia, India, China) story is far from over, despite concerns over a slowdown in economic growth. In his blog post, Mobius says he is not worried about what many market watchers call a "middle income trap" for these countries.

"I don't think the BRIC economies have hit a brick wall. One theory in play is the concept of a "middle income trap." The premise is that emerging countries can find it hard to sustain high per-capita growth rates beyond a certain point since benefits from technology, low labor costs and easy productivity gains run out before the accumulation of technological capital permits a transition to a higher-wage, higher-productivity economic model. Our team is not convinced that this argument holds muster for the BRIC economies-or emerging markets as a whole," writes Mobius, executive chairman, Emerging Markets Group, Franklin templeton, in his blog.

Mobius is bullish on India, but with a caveat that continued growth would depend on political will. Last week, the government showed some political resolve by hiking diesel prices, approving partial stake sale in select public sector companies, and allowing foreign direct investment in the retail, aviation and broadcast carriage (cable/direct-to-home) sectors.

"Despite its obstacles, India's economy has proved adept at generating growth in recent years without heavy investment and with a much better ratio of growth to capital spending than China. Unlike in China, India's working population is generally expected to experience strong growth over the next decade, and reserves of labor among the rural population are large. The impediments to continued growth should be surmountable, in our opinion, provided the political will is there-which leads us to believe in the economy’s growth potential," writes Mobius.

Mobius' thoughts on China, Russia and Brazil:

China: A substantial investment in higher education has expanded the pool of educated labor, and demand is growing from the ongoing, rapid rise in the size and wealth of China's middle class. Consumer indebtedness, including mortgage debt, is low in China. Given these circumstances, we think China should be able to join South Korea, Taiwan, Hong Kong and Japan in escaping the "middle income trap."

Russia: Like China, Russia too may see its working-age population decline. However, we think Russia's middle class also could swell as wealth from commodity exports could filter through the economy. Businesses supplying consumer goods and services to this burgeoning market appear to have potential to benefit.

Brazil: It may be more vulnerable than other BRICs to fluctuations in the prices and demand for commodities, an area which financed its recent growth. However, in our opinion, we don't see short-term commodity pullbacks leading to long-term weakness, as growth in several other emerging economies appears likely to continue to support demand.