In 2001 the acronym ‘BRIC’ was coined to refer to Brazil, Russia, India and China, which were all deemed to be at a similar stage of rapid economic development. South Africa joined what then became the BRICS in 2010. From 1990 to 2014, the BRICS’ share of world GDP grew from 11 to almost 30 per cent.
However, there was a huge slowdown in growth and increasing divergence in more recent years. Now, as investors once again pile into emerging markets, we consider how much these countries really have in common and whether there is still a valid argument for grouping them together. The term BRIC was first popularised in 2001 by former Goldman Sachs economist Jim O’Neill, who used it to refer to the fastest-growing and largest emerging market economies. BRICS countries have all welcomed some form of capitalism and they all have growing middle classes, but they also have very different political and economic systems. So how much do these countries really have in common?
Ed Smith, head of asset allocation research at Rathbones, says: ‘The BRICS group has only ever really been about China and India. Russia and Brazil had neither the economic nor the demographic clout that India and China possessed.’ They have accounted for less than 5 per cent of the growth in the global workforce since 2005 and less than 5 per cent of the growth in global GDP, compared with China’s and India’s combined and respective 35 per cent and 40 per cent.’ He adds that India looks very similar today to China around the start of the millennium.
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‘The five BRICS are more united by their differences than by their similarities,’ argues John Redwood, chief global strategist at Charles Stanley. First, China and India are in a league of their own in terms of size, with populations of around 1.4 billion. Brazil has 200 million people, Russia 140 million and South Africa just 56 million.
Redwood further argues that China has been successful at growing its economic output and boosting incomes. As a result, it is now producing more than the other four economies combined. China, Brazil and Russia are middle-income countries, with GDP per head well above the level in India and also above the level in South Africa.
‘India has scope to become one of the world’s largest economies, but it still has a lot further to go to increase incomes per head,’ he says. Moreover, South Africa, Russia and to some extent Brazil rely on mining and the production of oil and commodities, whereas China and India are more dependent on imports of raw materials.
Politically, too, the countries are wildly different. China has a unified single-party system, as has Russia in all but name. Meanwhile, ‘the democracies in India and Brazil are the complete opposite: where a head of state surviving more than one term can be seen as quite an achievement,’ says Will Ballard, head of emerging market and Asia Pacific equities at Aviva Investors.
What they share, politically, is ‘a resentment about being under-represented in the traditional global governance structures’, says Raheel Altaf, co-manager of Artemis Global Emerging Markets. He adds: ‘[Moreover] they are all modernising their military capabilities to preserve their strategic interests .’
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So is there still a valid argument for grouping these countries? Smith says: ‘No, there never was one in the first place, at least beyond the marketing power of a good acronym.’ In contrast, Richard Stammers, investment strategist at European Wealth, believes there is a case. However, he warns: ‘Having long-term opportunities in common does not make BRICS a single asset class with similar performance characteristics.’
Altaf argues that a number of other countries could conceivably also be included in the BRICS group, including Mexico, Turkey and even Indonesia. He says: ‘The grouping may also help relations between the countries, particularly between India and China, given their past hostilities. The BRICS group, which faces common challenges, now holds meetings to cooperate in areas such as security, health and education.’
So what is the outlook for the BRICS? Stammers says that, ultimately, China and India are looking to become leading global providers of goods and services, so they make things. In contrast, Russia and Brazil are expected to become the global giants in commodities, so they provide the basic raw materials needed to make those things.
Paul McNamara, an investment director and lead manager on emerging market bond, currency and hedge fund strategies at GAM, says: ‘China and India matter a lot; the other two are secondary.’ All the BRICS countries face different obstacles. ‘Russia is crippled by dysfunctional institutions and corruption, but Brazil is slightly better off,’ comments McNamara. Redwood says Russia has ‘suffered a setback from the lower oil price, which has hit its export earnings and tax revenues, and from Western actions, which have made some trade and transactions more difficult’.
Redwood observes that Brazil has been through a bad political and economic crisis, with recession, high inflation and difficult corruption problems forcing changes of government. He says: ‘There is now some hope of recovery, but there remain deep-seated economic and political problems to resolve fully.’ South Africa too has been suffering from political instability and failing economic policies. ‘Future sustained progress in both Brazil and South Africa will need stable reform-oriented governments that can shake off the problems of the past,’ he adds.
India has become the poster child for reform-led recovery in emerging markets, argues James Penny, senior investment manager at TAM Asset Management. ‘With the appointment of prime minster Modi, the country has been put on a path of steep and deep economic and government reform to bring its economy and vast middle-class population to the forefront in the modern market.’
However, Penny says the biggest and, on the global stage, the loudest of the BRICS nations remains China. The country continues to make headlines speculating about whether its economy could suffer a ‘hard landing’ in the face of its highly leveraged corporate sector and a fall in GDP to 6 per cent. But he is keen to put these figures in context: ‘Let’s be clear here,’ he says. ‘The US is struggling to find 4 per cent GDP growth, the UK is looking at 1.5 per cent, and the world is worrying about a Chinese slowdown to 6 per cent GDP growth?’
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The growth rates of the BRICS economies, with the possible exception of India’s, over the next 10 years is likely to be about half that of the previous decade, according to Smith. India’s and China’s shares of global GDP growth will probably be smaller, but the countries will remain dominant.
‘China will remain the largest [BRICS] economy and should continue to command investors’ attention,’ he says. ‘But if India opens up and reforms, investors should begin to devote more of their attention to the subcontinent.’ That said, he points out that, given the relative size of the two economies today, it would still take more than 30 years for India’s GDP to exceed China’s, even if India achieves all its reform goals and China achieves few of its aims.
Ultimately, the strength of the BRICS as an investment proposition is their very diversity, argues Ballard. ‘They are so different that they provide an element of diversification beneficial for any long term investor.’
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This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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