The BRIC economies, in recent years, have moved on to a higher growth trajectory. This phase of dynamic growth has also been marked with strong equity index. Much of this sharp increase in equity index can be attributed to a revival of the BRIC industry, particularly the manufacturing segment.

In a recent study, titled, ?Analysis of mean and volatility spillovers using BRIC countries, regional and world equity index returns (2007)?, Bhar and Nikolova found a high degree of integration between BRIC countries and their respective regions, and to a lesser extent with the rest of the world.

Their study shows that regional trends are found to have a much greater influence than world trends upon the stock return process of BRIC countries. They have shown that the world index returns, and most likely the US equity market returns, have a significant influence upon the variance of returns seen across Brazil, Russia and India.

China is the only country where exists a negative relationship between volatility spillover effects on a regional basis and a global basis, according to them. Their findings also indicate the existence of diversification opportunities for investment managers in the country.

Recall the Goldman Sachs forecast that BRIC countries will outperform the current richest countries by 2050. This forecast is dependent upon BRICs maintaining policies and developing institutions that are supportive of growth. Higher growth in these economies is expected to see the influence of the BRICs in investment portfolios rise sharply. However, the Bhar and Nikolova report concentrates on measuring the effect of the mean and volatility spillovers of world and regional markets on all BRIC countries during the post-liberalisation period (1995 to 2004).

The mean and volatility spillovers in turn, are indicators of the level of integration demonstrated by these countries on a regional and global basis. Each of the BRIC stock exchanges is located in a different time zone. As such they operate different trading hours. Given the almost 50% of the world index market capitalisation is represented by US stocks, the New York stock exchange trading hours have been used as a proxy to determine the timing differences in trading hours between the world and the BRIC indices.

The time difference between Brazil and New York is one hour only, whilst the time difference between Russia, India and China compared with New York is eight hours, 11 hours, and 12 hours, respectively. This means that a shock in the world market during day will not be reflected in the Russian, Indian and Chinese stock exchanges until day t+1 (trading plus one).

Bhar and Nikolova assumed a pairing time of ?day-trading? for the world and trading for Russia, India and China. Their study was based on the daily closing market indices for Brazil (Bovespa), Russia (AKMI Composite), India (Sensex), and China (Shanghai Composite).

The results of this study suggest that the conditional mean returns and the volatility of the BRIC countries are influenced by the world. The mean spillover effects from the world are positive for all BRIC countries, whilst the volatility spillover effects are positive for Brazil, Russia and India but negative and significant for China. This implies negative correlation between the world equity index returns and the Chinese equity index returns, and suggests existence of portfolio diversification opportunities for international investors and portfolio managers.

Then again, the regional markets have greater influence upon the equity price creation process in all BRIC countries as opposed to the world, given that the coefficients for all BRIC countries are statistically significant and positive.

The results for the volatility spillover effects were somewhat more versatile. Regional rather than global influences have a greater effect on return volatility in Brazil. This is most likely due to the US market representing a higher proportion of the America?s regional equities returns index than the world equities returns index.

Volatility spillover effects on both Russia and India were greater on the global, as opposed to the regional basis. China is the only country for which the volatility of returns is negatively related to both world and regional equity index returns, and regional influence is greater than any broader international influence.

The study, therefore, shows that regional trends have greater influence than the world in the equity price creation process for all BRIC countries. This indicates the presence of regional integration of all BRIC countries in terms of equity price creation. In relation to the volatility of returns, it is implied that the world, and most likely the US equity market, significantly influences the variance of returns for Brazil, Russia and India. China is the only country for which there is a negative relationship for the volatility spillover effects for both the world and regionally.

All BRIC countries have begun the process of integration on a regional, and to a lesser extent global basis. The moderate magnitude of spillover coefficients suggests that this process is ongoing. It should also be noted that the increased levels of integration of these economies regionally and across the rest of the world highlights the need for employment of portfolio stock selection strategies and investment in the country index.

If the findings of study have anything to indicate then what we can say is that the global portfolio managers can still add value from investments in BRIC countries. The increased levels of integration of these economies highlight the need for portfolio stock selection strategies as well as investment in specific growth areas within these economies, rather than taking a position in the country index.

?The author is Fellow, Research and Information System for Developing Countries (RIS), New Delhi. The views expressed are personal. He may be contacted at prabirde@ris.org.in