This year marks a decade since ‘the BRICS’ was coined as shorthand for the investment strategy that argued its emerging market members could grow faster than their developed counterparts.
Brazil, Russia, India, China and South Africa were all considered a strong bet for growth between 2010 and today – not all of their economies have delivered.
While some – notably China and India – have already become respected players in the technology sector, many economists believe it will be 2050 before the majority of manufactured goods, services, and raw materials are supplied by these nations.
The acronym ‘BRIC’ was coined in 2001 by British economist Jim O’Neil and represented four rapidly developing countries behind the shift in global economic power away from the developed G7 economies – South Africa was officially added in 2010
The BRICS countries’ unifying criteria are high economic growth and large size in terms of population and area, though the countries vary greatly in terms of economic development, structure, and interests.
In 1990, its members represented 11 per cent of global GDP, and had grown to 30 per cent by 2014. However Scott Spencer, of BMO Global Asset Management, believes they are still very much emerging markets, though towards the top end of the category.
But how far into their journey to becoming developed markets has each nation got? And how likely is the prediction, that they will be among the world’s leading economies in 30 years, to come to fruition?
We spoke to industry experts about how they think the BRICS countries have fared over the past decade and whether they’re on track to becoming the booming markets renowned economist Jim O’Neill said they would be when he coined the acronym back in 2010.
|Index||Year to date (%)||Five years (%)||Ten years (%)|
|MSCI South Africa||-20.93||1.16||19.34|
|MSCI Emerging Markets||0.95||73.72||67.03|
|Source: FE fundinfo. All figures to 18 August 2020|
Brazil rocked by political scandal
Brazil has fared the worst out of its BRICS peers both year-to-date and over the long term.
From the time the acronym was coined in 2001 to when it became an official institution with the addition of South Africa, the Brazilian economy grew from $559billion to $2.21trillion.
But this had fallen back down to $1.87trillion almost a decade later in 2019 and the 2015-16 commodity slump saw the country enter a multi-year slowdown with up to 30 per cent spare capacity in the economy in the past few years.
Barings’ Omotunde Lawal
Omotunde Lawal, head of emerging markets corporate debt at Barings, said one of the most notable changes over the past two decades for Brazil, has been the discovery of pre-salt oil reserves in 2006, which currently account for around 48 per cent of national oil production.
The other is the infamous Lava Jato scandal.
She says: ‘Lava Jato – otherwise known as operation car wash – was and is an ongoing criminal investigation which shook Brazil to its core. However it also gave a much needed kick to the corruption culture which was endemic in Brazil.’
Lawal’s view on Brazil is to see longer term positives coming from the country tackling the corruption issue.
‘This has helped with a cleaner slate for the corporate sector and has helped many businesses improve their environmental, social, and corporate governance credentials at a time when the investment community is increasingly focusing on ESG,’ she adds.
Foreign investor sentiment has swung back and forth during this time, and more recently, the country’s risk assets have underperformed due to economic, political and coronavirus-related volatility.
The Brazil Corporate Emerging Market Bonds Index returned just 0.14 per cent during the first six months of the year versus the wider LATAM Index which is up 0.64 per cent.
Brazil has been one of the most affected countries by the coronavirus, with the second highest number of confirmed cases and deaths in the world at 3.4million and 110,000 respectively.
As a result, GDP forecasts for 2020 are for a decline in the range of 5.5 per cent and 5.7 per cent.
Lawal adds there is an increasing expectation that Brazil could see an improved recovery in the second half of the year despite balancing reopenings and Covid-19 containment measures with a subsequent recovery in GDP growth in 2021 between 3 per cent and 3.5 per cent.
Despite poor performance, Lawal and the emerging market debt team at Barings still see some attractive opportunities in Brazilian corporate bond space.
She said: ‘Brazil still has some interesting investment opportunities. Its spreads continue to seem cheap within the emerging market context, with average yields as at 31 July of 5.5 per cent, relative to 3.8 per cent in Chile, 4 per cent in Mexico and against the average Latin America yield of 5.2 per cent.
‘We like oil and gas with companies such as Petrobras, metals and mining – Vale, CSN, Gerdau – and the protein space with the likes of JBS, Marfrig, BRF foods and Minerva.’
However Lawal remains concerned about Brazil’s financial sector due to the expectation of deterioration in asset quality from the fallout of the pandemic.
‘Corporate and household sectors have enjoyed better access to credit than they perhaps would otherwise have,’ she added.
‘The expectation is when these stimulus measures end, we will see a spike in non-performing loans across the global banking sector, with the Brazilian banks no exception.’
Russia ‘attractive if prepared to take the risk’
Russia has also faced its own headwinds over the years, in the shape of sanctions, political strain and oil price volatility, which continues to be a major indicator of the direction of the Russian market.
Oleg Biryulyov, manager of JPMorgan Russian Securities investment trust, believes overall the Russian market has always remained attractive for those investors prepared to take the risk.
He said: ‘Russia offers a number of attractive investment opportunities in world-class assets across the energy, basic materials and domestic industries.
‘There is also good value in precious metals businesses such as Polyus, Russia’s largest gold producer, which currently offers relatively high dividend yields.’
How has Russia performed?
Russia hasn’t performed particularly well since the start of 2020, with the MSCI Russia index down 17 per cent. However, over five years it is up 121 per cent and 47 per cent over 10.
It’s a slightly better picture for Biryulyov’s trust, which is down almost 10 per cent year-to-date though it has returned 60 per cent for any longer-term investors.
He says: ‘The Covid-19 crisis has had a significant impact on the country with oil prices falling significantly. However by the end of April, as world central banks introduced multiple stimulus packages, global markets did indeed move towards a level of stability.’
The JPMorgan Russian Securities trust is down almost 10 per cent since the start of 2020
The JPMorgan Russian Securities trust has returned almost 60 per cent over the past decade
Where are the investment opportunities?
As recent performance suggests, Russia isn’t faring too well at the moment.
But an interesting development over the past two years that Biryulyov highlights is stocks paying high levels of dividends; a trend he expects to continue.
He says: ‘The Russian market yields 6 per cent from dividends, with room for potential further increases. We do, however, remain mindful of the continued market volatility, which is continuing to weigh on sentiment.
‘But despite market uncertainties, we continue to find long-term growth opportunities in sectors that have minimal correlation to the oil price, such as technology.’
Within the sector, Biryulyov likes Yandex, a multinational technology company whose revenues have increased as it has diversified its business interests.
He adds: ‘While its online advertising and taxi services have been hit, its search engine, blogging, video streaming and various delivery services have boomed during lockdown.’
A more politically stable India
Like its BRICS peers, and ultimately the reason behind the hype around the countries involved, India had a high nominal GDP growth rate a decade ago, largely driven by consumption.
David Cornell of Ocean Dial said the coronavirus has flared just as India was showing signs of a recovery in demand
However, an investor in 2010 would have had cause to hesitate before allocating money to India with a fiscal deficit of 6.5 per cent of GDP – an 11-year high – while inflation was double digits with real interest rates negative and rising.
A weak coalition government was unable to pass legislation and was facing the onset of high profile corruption scandals. 2010 also coincided with India’s worst ranking in the World Bank’s Ease of Doing Business Index at 139 out of 190 countries.
David Cornell, manager of the India Capital Growth fund, said this period was also characterised by high demand driven by global liquidity and excessive government spending, but insufficient supply leading to inflation.
He adds: ‘Today the reverse exists. Demand has collapsed as credit availability has shrunk due to inflation targeting, stronger banking sector balance sheet disclosure standards, and anti-corruption measures such as the Insolvency and Bankruptcy Code.’
Meanwhile the election of Prime Minister Modi has provided the political stability necessary for supply side reforms while infrastructure has dramatically improved.
The impact of the coronavirus
Unfortunately, the coronavirus has flared at a time when India was showing signs of a recovery in demand.
Cornell says: ‘While the temptation is to be quick to judge, it’s too early to opine how it has handled the pandemic, particularly as comparisons with other countries are difficult as few others face similar challenges on a similar scale with a similar toolkit – a large and densely populated country with a free media and democratically accountable decision makers.
‘The rate of new infections, concentrated in the metro-cities is concerning while the rate of recovery and the current lack of spread into the hinterland is encouraging.
‘Similar to everywhere else, the number of new cases has to come down in the near term for demand to have a chance of recovering.’
The election of Prime Minister Modi in India has provided political stability
A sustainable growth story
Over the long-term, India is one of the BRICS nations that has done reasonably well and its potential remains strong.
Historically dependent on flighty risk capital, now the likes of Google, Facebook, Amazon, Walmart, Berkshire Hathaway have committed serious investment into the country, while Apple has just announced its plan to have 10 per cent of its global manufacturing sourced from India within five years.
Cornell adds: ‘India is transitioning from a volatile, boom and bust, liquidity driven economy to a steadier and more sustainable growth story that is attracting a different type of investor.
‘Compared to 2010, inflation is low, interest rates are coming down, and growth (corona-depending) is bottoming.
‘Political stability has allowed a rules-based system to replace a patronage driven one. The world views India differently now and for good reason.’
Is China still a BRIC?
China is without a doubt the best performer of the BRICS with a huge return of 138 per cent since 2010 and even 17 per cent since January despite being the origin of the coronavirus outbreak.
When the world was emerging from the global financial crisis 10 years ago, China’s GDP was just over $5trillion. It is now $14trillion. Meanwhile the economy is now five times larger than the UK, which over the same period, only grew from $2.4trillion to $2.8trillion.
Colm McDonagh, of Insight Investment, BNY Mellon, says China’s growth over the past decade has been enormous and it is now an economy too big for any investor to ignore.
‘It is not only a major player in the global economy but also has the second largest bond market in the world, having overtaken Japan in earlier this year,’ he says.
‘For investors seeking income, there are opportunities in both government and corporate bonds which were not available a decade ago because China had not yet opened up its market.
‘There are opportunities now in sectors such as financials, industrials and property. In the equity market, companies such as Alibaba and Tencent are now global players rivalling US tech companies.’
McDonagh feels China no longer fits into the BRICS category, in many ways, as it appears to have more in common with developed markets today, and at Insight, China is classed as such.
Insight’s McDonagh thinks China no longer fits into the BRICS and is now a developed market
Greater access for international investors
One significant factor in China’s progression has been the opening of its economy over the past 10 years allowing more access for international investors.
Although expanding access has been a draw, other key attractions are the sheer size of the Chinese market and the introduction of the One Belt One Road Initiative, a global infrastructure development strategy set out by its government in 2013.
McDonagh says: ‘The strategy has extended China’s trade lines globally and had a significant impact on the number of countries and companies now in China’s economic orbit providing opportunities for investors.
‘China is now a serious global player seeking to rival the US. In the past, the global economy has been very much impacted by the US, it used to be that if the US sneezed the rest of the world would catch a cold.
‘Going forward we expect to see the same with China over the next 10 years. The level of consumption from China will continue to have a huge impact on the rest of the world.’
Opportunities for investors
Investment opportunities for China are strong and are not going away. But investors considering any global investment, still need to do their homework.
Trade tensions with the US will likely continue and there may well be some clustered outbreaks of the coronavirus, though recovery is still expected to be strong.
‘China has a huge opportunity set, but like every economy, there are areas you would not wish to invest in,’ says McDonagh. ‘Investors must delve deep to ensure they have the full picture and are investing in opportunities where the financials are secure.
‘With its growth and scale, the Chinese market will continue to be a considerable part of investment portfolios, especially those seeking income.
‘We expect China to continue to grow in size, and rival the economic sphere of influence that the US has occupied.’
South Africa: A gold mine entrenched in corruption
South Africa was not an original ‘BRIC’ nation but was added in 2010, with the grouping renamed to BRICS to reflect the expanded membership.
At this time, the country was the host of the World Cup which helped build upon its infrastructure and telecommunications network, which it still benefits from today.
In 2010, demand for precious metals was high, with South African mining companies being among the largest stocks in the world, and this also remains the case today.
However South Africa has been impacted by economic mismanagement for many years, with Jacob Zuma at its helm for almost a decade.
Nick Price, of Fidelity’s emerging markets equity team, says: ‘Today, we see little in the way of progress, despite a change in leadership.
‘Hopes that Cyril Ramaphosa would successfully address entrenched corruption, and drive necessary reforms have been met with disappointment, while the global pandemic delivers a further blow to this beleaguered economy.’
How does its economy fare today?
It is therefore no surprise that South Africa has had little growth over the past 10 years, with the MSCI South Africa index returning just shy of 20 per cent over that time.
The country has high levels of entrepreneurism and therefore small businesses, though many are suffering through the current challenging environment.
Price adds: ‘The government does not have the balance sheet to support the economy with adequate fiscal manoeuvres. The specific nature of the current crisis means economies with a higher exposure to SMEs will take longer to recover.
‘All in all, the outlook for the South African economy remains weak, dented by severe underinvestment and continued delays to economic reforms.’
The manager says South Africa remains very much an emerging market today.
Fidelity’s Nick Price believes the investment outlook for South Africa remains weak
Should you invest?
Price says it is ‘abundantly clear’ that the pessimistic view of South Africa at the moment is reflected in valuations and that investors should be ‘extremely judicious in allocating capital into its market, ensuring there is sufficient margin of safety’.
However he still believes some areas of the market are particularly interesting and recently increased exposure towards South Africa in the Fidelity Emerging Europe, Middle East and Africa fund.
‘Of course, investing in all emerging markets comes with risks, but we increased the exposure primarily via positions in exporters,’ he says.
‘For dollar-earners, local currency weakness is helpful, as it deflates the costs associated with operations, and boosts their competitiveness.
‘Here, we initiated positions in gold miners. An environment of loose monetary policy and uncertainty is set to support the pricing environment for commodities such as gold and other precious metals.’
Given a weaker macroeconomic backdrop, Price remains more cautious towards domestic names but believes commodities will continue to play a critical role in determining the outlook.