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The case against investing in Brics

This article is part of
Guide to Gaining Exposure to Bric Growth

An investment in Bric markets can potentially be greater risk than say an investment in developed markets.

Ayesha Akbar, portfolio manager in Fidelity’s Investment Solutions Group, warns there was very little correlation between economic performance of Brics and stock market performance.

She adds that there are plenty of other emerging economies that are growing strongly and have low stock market valuations. Given that the wider universe comprises of a wider array of countries and therefore is more diversified, she argues investors should broaden their emerging martet horizons beyond Brics.

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“Why limit yourself to just four countries when there are at least 20 others to choose from? After all, in volatile markets you want diversification.”

Maarten-Jan Bakkum, senior emerging market strategist of ING IM, agrees a downside of Bric funds was the emerging markets exposure is limited to only four markets.

Mr Bakkum explains good opportunities in the smaller emerging markets are not being exploited by Brics, and that Chinese growth is the one dominant driver - adding that China does not necessarily look like a theme an investor wants to be exposed to in the coming years given the Chinese slowdown and ‘bubble’ fears.

The Bric universe is more concentrated than wider global emerging markets owing to their less developed status and somewhat higher beta, Allan Conway, head of emerging market equities for Schroders, concurs.

He joins Ms Akbar in warning Bric stock market performance can be more volatile compared to developed markets.

That said, Mr Conway argued investors have historically been more than compensated for higher volatility by higher returns. Obviously, however, past performance is not a guide to future returns.

He adds: “Environmental, social and governance (ESG) issues, although generally improving, can be weaker for Bric companies compared to developed companies; for example the role of the state can be greater and state owned enterprises (SOEs) can be significant constituents of some Bric stock markets which, in certain cases, can raise question marks over the treatment of minority shareholders.

“Explicitly incorporating ESG analysis into bottom up stock research to ensure awareness of any ESG issues and to assess the potential impact of issues on future stock performance is therefore very important, in our opinion.”