InvestmentsMar 26 2014

Brics: shaky building blocks

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      When Goldman Sachs’ Jim O’Neill coined the term Bric in 2001 to refer to the grouping of Brazil, Russia, India and China, it marked an economic moment when money and power had the potential to shift away from the developed world to the developing world. The intervening years have been mixed for the Brics at a time when the stock markets of more developed economies have bounced back.

      An arbitrary grouping

      These countries - as well as being classified as emerging markets by MSCI - cover more than a quarter of the world’s land mass. Many argue that it was partly on these grounds that they were grouped together and this is only the beginning of criticism of the Brics concept at this point in its history.

      “The main rationale is that those countries are very large. Whether a country is large or not has absolutely nothing to do with whether or not it’s a good investment,” says Jan Dehn, head of research at Ashmore.

      “They sell well, but if you’re a serious investor, you care about diversification and getting access to the full range of investment opportunities. Those interests are not best served by focusing on a subset that constitutes less than 10 per cent of the emerging markets,” says Mr Dehn. “It’s definitely testament to Jim O’Neill’s capacity as a salesman.”

      One of the reasons the Bric concept has worked is its ability to tap into the widespread ignorance and misunderstanding of emerging markets. Packaging them up together as Bric or Mint (Mexico, Indonesia, Nigeria and Turkey) means investors feel they are somehow safer or more legitimate options. It creates a buzz around a specific emerging markets narrative, and appears to take some of the legwork out of choosing the ‘right’ parts of the EM universe, although this could come at the expense of a sensible investment.

      David Coombs, head of multi-asset investments at Rathbone Unit Trust Management agrees. “I’ve never bought a Brics fund. I don’t see it as an asset class or a reason to invest, although it’s quite catchy,” he says.

      Their context in emerging markets

      The characteristics on which the Brics countries were grouped together in the first place are widely acknowledged as insufficient reasons to invest in a region or market. Instead of buying in to the acronym, investors are better placed to look at the dynamics of the country in terms of rule of law, the size of the stock market, liquidity, quality of the central bank, and fiscal and monetary discipline.

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