September 15, 2015    7 minute read

BRIC: An investment choice?

   September 15, 2015    7 minute read

BRIC: An investment choice?

In 2001, Jim O’Neill (then Chairman, Goldman Sachs Asset Management) coined the term BRIC, to demonstrate the tremendous potential for growth of the economies of Brazil, Russia, India, and China. Rapidly adopted as popular terminology, this led the different governments involved to move towards a slow but planned programme to join forces for development.

In September 2006, the countries’ representatives held a joint discussion at the sidelines of the UN General Assembly, followed by the first formal meeting in June 2009. South Africa realized the potential of being included with these regional leaders and requested to join the group in 2010. The BRICS group, as they were now called, formed a Forum and began to work together to gain economic relevance through trade and cooperation.

The spotlight was on these regional leaders, partly due to their perceived dominance in manufactured goods (China), services (India), and raw material supplies (Russia and Brazil) and partly recognizing their strong consumer demand and foreign exchange reserves even during the financial crisis of 2007-2009 This encouraged fund managers and investors alike to consider the group as an attractive investment opportunity. Various structures focusing on BRIC investments were initiated; a reputed financial database records over 180 funds set up mainly between five and ten years ago to invest in BRIC equity.

Working together

The BRIC countries make up nearly half of the total world population and account for more than 25% of the world’s GDP. Their demographic potential gives them a reasonable advantage in the climb towards economic supremacy, leading to potentially higher demand, consumption, availability of a productive work force, innovation, revenue for the government and other benefits. With this advantage already available to them, the member countries began their joint co-operation with a key institutional initiative that could further their common interests.

Funding and related policies have always been one of the main areas of debate for developing countries borrowing from the World Bank and IMF. Following frequent discussions with these organizations to amend their policies, one of the first initiatives of the group was the formation of the USD 50 million New Development Bank (formerly BRICS Development Bank) headquartered in Shanghai and supported by a USD 100 million Contingent Reserve Arrangement. The bank’s president K V Kamath, an eminent banker from India, recently mentioned in a press interview that the bank would prioritise use of its capital towards member countries, aiming to start lending in local currency by April next year. One of the key aims of the NDB is to provide a viable alternative to the perceived risks of exposure to US Dollar as well as borrowing from the World Bank and IMF, giving developing economies an opportunity to have an active say on how credit is distributed both between and within their countries.

Moving to another key driver of economic growth and resultant prosperity, the countries signed an agreement of cooperation on innovation in the 2014 6th BRICS Summit along with South Africa. India, Russia and China are considered to have a significant amount of human capital contributing to thought leadership and are among the biggest exporters of economists and scientists to the West. However, the countries have widely differing rankings in the Global Innovation Index 2014, ranging from China at 29th to India, the lowest among the four countries, at 76th. Working jointly to share knowledge and create innovation-based companies who can obtain finance from the SME stage onwards will pay rich dividends in improving their positions and realising potential.

In addition, BRIC countries and South Africa are co-operating on other areas of global concern. The Action Plan for 2012-2016 spells out creation of systems and strategies for sharing information and innovations in the agriculture sector ensuring access to food and addressing the impact of climate change on food security. Green energy, judicial reforms, cyber security and defence are all pacts being discussed between some or all of the BRICS partners.

Current state

The co-operation exhibited by the BRICS countries in different areas creates a forward-looking, optimistic backdrop of economic possibilities. Against this however is the current play of events : each of the countries is dealing with different challenges of varying magnitude. This adds to the complexity of the bloc, where each of the countries can be considered to have vastly different economies, foreign policy aims and political systems.

Brazil has to deal with their sovereign debt ratings being downgraded by Standard & Poor’s from investment grade (BBB- , achieved in 2008) to BB+ (junk grade), due to highlighted risks of the government’s difficulty in balancing the budget and the first major economic downturn in 25 years. This has already started to cause a major outflow of money from the economy.

Russia is another one of the major economies in the world which is considered to be a target for recession in 2015. The oil price dips have the potential to cause a big issue for Russia, as 70% of Russia’s GDP is dependent on oil (oil and gas make up almost two-thirds of Russia’s exports).

The Chinese equity markets debacle has caused some knee- jerk reactions. This has been further fuelled by uncertainty due to the reform of the RMB exchange rate and data such as the drop in the manufacturing sector after a gap of 3 years and has prompting investors to evaluate other options and shift investment focus.

Recent flip-flops in the Indian equity market, uncertainty due to the vulnerability to the Fed rate, political issues delaying reforms, and slippage in exports due to slowing global demand (Indian exports slipped for an 8th month, the longest decline since 2009) raise the same issues for India.

BRICS as an investment opportunity

In summary, the BRIC nations continue to have a lot going for them in terms of their population, resources and their determination to succeed. The increase in the middle class population of the BRIC countries is forecasted to more than double that of the developed G7 economies by 2020, leading to economic growth and expansion. (However, the question that remains to be answered is whether being part of BRIC is bringing any benefit to each of the governments in dealing with the various political, economic and social issues being thrust upon them by the global economy as well as internally. Or is this just a convenient grouping for financial statisticians and analysts with no real coherence between them.

As a reputed financial database shows, there are over 180 funds managed by different fund houses that invest in BRIC equity set up between 1 to 10 years ago, and less than 5 show positive returns over the period of their inception. Evidently, translating the BRICS countries complementary strengths into a competitive advantage may take considerably more time, effort and possibly luck.

The notion of BRIC perhaps caught both writers’ and investors’ imagination, lending itself as it did to a picture of solidity, dependability and security. However their current levels of performance suggest that it may be more appropriate to view future investments in terms of individual countries, as opposed to similar blocs (such as the Next 11, MIST and EAGLES representing different groups). Risks are possibly more likely to be identified and controlled, with less chance of the entire fund group catching a cold when one of the member’s sneezes. Otherwise, the “long term’ nature of the investment advertised by reputable  fund managers may lead to a rather long, weary wait for profitability.

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