Following the expansion of the BRICS group, Sarah Godfrey looks at which constituents offer the best opportunities
Last month saw the 15th BRICS summit take place in Johannesburg. At the meeting, the five members of the group – Brazil, Russia, India, China and South Africa – announced that they were inviting six more countries – Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates – to join the geoeconomic bloc. But what does this mean for global geopolitics, and are there any implications for investors?
The term ‘BRIC’ was first coined in 2001, in the paper Building better global economic BRICs, by Goldman Sachs’s Jim O’Neill. Its thesis was that the four largest emerging economies (South Africa was a later addition) would become increasingly important as a share of the world’s GDP, with collective economic growth outstripping that of the G7 countries. In the years that followed, a slew of BRIC investment strategies were launched, although only two open-ended funds (run by Franklin Templeton and HSBC) remain today.
The jump from a clever marketing slogan to an economic and political alliance was perhaps an unexpected one, but since the first group meeting of the foreign ministers of the four original BRICs at the United Nations in 2006, the bloc has become a more formal intergovernmental organisation aiming to provide a counterweight to the influence of the G7 group of developed nations. South Africa formally joined in 2010, meaning BRICs with a small ‘s’ became BRICS.
“Although these countries probably do not agree on a lot, they all feel misrepresented on an international level by the current institutions,” says Gustavo Medeiros, head of research at emerging markets fund manager Ashmore. “It would be a struggle to point out any agenda from the global south that has been picked up by the G20 – so these countries have a sense that the current system is not working for the global south, and the nations that are joining the BRICS group reflect that there are more countries that feel like their agenda is not well addressed.”
However, Kamil Dimmich, manager of the Pacific North of South All Cap EM Equity Fund, is sceptical that such a disparate group can successfully challenge the established order: “The G7 has very clear membership criteria – it is no longer the seven largest economies, but is probably the largest seven free-market democracies – so it can make decisions jointly and talk in one voice – but that is not really the case with the BRICS, and even less so with the expanded group,” he says. “They are unlikely to become a unified group that has clout, because they don’t agree on very much,” he adds. “There will be statements and photos, but India and China are fundamentally rivals.”
Investing in BRICS
From an investment perspective, both Dimmich and Medeiros agree that many of the countries that will make up the expanded BRICS are interesting, although more as constituents of the global emerging markets universe than in any expectation of cohesion. “I am a global emerging market equity fund manager, and the universe is interesting partly because it is so diverse,” says Dimmich. “What creates a political problem for the BRICS is positive in investment terms. Correlations between emerging markets are much less than between developed markets – some markets are actually negatively correlated, and many are zero or near zero.”
Medeiros adds: “The period from 2002 to 2012 was probably very good for investors in BRIC. Today it is much harder to make the case for BRICS, but there is significant evidence to suggest that long-term investment in emerging and frontier markets allows you to harvest higher-than-average returns. Frontier markets tend to be poor, with almost non-existent capital markets, and as such they have a risk premium and if you are patient, you should be able to harvest it. Emerging markets are where risks exist but are priced in. Developed markets have ‘risk-free’ assets – the financial model depends on it – but it is an illusion; every country has political risk, and institutional development is not linear.”
Looking at the countries in the expanded BRICS universe, Dimmich says: “The UAE is an interesting addition to the BRICS group from an investment perspective – it has completely different dynamics from, say, China; its economy is not cyclical, its population is growing through attracting educated, skilled people to live there – so you can play the UAE without having to worry about the slowdown in China and its infrastructure boom ending, which will affect exporting economies such as Brazil and Indonesia. Argentina is like the inverse of the UAE – it is constantly harming itself, employing policies that are detrimental to investment, lurching from crisis to crisis – so it’s not correlated with the UAE, but is perhaps also not a market I would want to be invested in.”
Argentina and debt
Medeiros – whose firm invests across all asset classes, from sovereign and corporate debt to equity, private equity and infrastructure – has a different view on Argentina, which he sees as “probably one of the most interesting from a sovereign debt perspective”. However, this is informed by the probability that the country will not in fact join the BRICS alliance, given both the frontrunners in the current presidential race oppose membership of the group. “In my simple view, the Argentinian malaise is a fiscal problem,” he says. “Today the discussion is pointing towards whether there will be a well-structured fiscal consolidation or an insane fiscal consolidation; Javier Milei, who won the primary, is saying he would get rid of two-thirds of the government ministries and the central bank. It’s very interesting – bonds are trading as if Argentina will restructure its debt very soon and suddenly, but a lot of it is not Argentina’s fault and could be resolved.”
Opportunities in the UAE
Like Dimmich, however, he sees opportunities in the UAE. “Saudi and the UAE are very interesting – they will be ‘last man standing’ in fossil fuels and will therefore have a role in the energy transition, as you can’t just turn it off, but there is also interesting economic diversification, and reforms even at a cultural level.”
Dimmich’s valuation-aware investment approach means he currently has no investments in India – “not because we don’t like the country, but because valuations are very high, so we are biding our time – we have lots of other ideas elsewhere. Where a market is overvalued and too popular, an active manager can shift to a better balance of risk and reward drivers.” Medeiros agrees that stretched valuations mean Indian equities are less attractive at present, although he sees interesting opportunities there for the medium to longer term. “Valuations are stretched at present because a lot of capital has relocated from China. If China can regain some of its mojo, India could see a bit of rebalancing,” he says.
Fundamentally, investors will likely do best by considering individual markets on their own merits, rather than their membership of a particular group such as the BRICS. “All the BRICS+ have investment opportunities, but maybe I am making the case to just go out and invest in emerging markets,” says Medeiros. He points out that while Indonesia – a market where “there are quite a lot of mispriced assets” – applied to join the enlarged group, the incumbents could not agree on its inclusion. “A BRIC fund could do quite well, but an allocation to emerging and frontier markets in general would be more sensible in both equities and fixed income,” he concludes.