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For about a decade many investors believed investing in the four BRIC countries – a concept launched by Goldman Sachs Asset Management – was the easiest way to profit from growth in emerging markets. But times have changed.
Simplification is not always the best approach. When Jim O’Neill, chief economist at Goldman Sachs AM, coined the term BRIC in 2001, it was quickly embraced by many of the main asset managers worldwide. BRIC funds offered investors a simple way to gain exposure to the equity markets of the four biggest emerging economies Brazil, Russia, India and China. BRIC funds were arguably a commercial success, but the economic tide has now turned against two of these Big Four economies, says Wim-Hein Pals, head of the Robeco Emerging Markets team.
“Brazil has been a big disappointment for years now. Little that President Dilma Rousseff has done has gone right, and currently the Petrobras’ corruption scandal is taking its toll,” he says. “This may be good in the long run, but the country is feeling the pain right now. Economic growth has been subdued for years and Brazil is heading for a recession.”
Corruption has hurt growth
A growth rate of 5% or 6% per annum, similar to levels achieved by countries like Indonesia and Turkey, should be possible for Brazil with all its potential, but it has only managed to generate between 1-2% over the last decade. Bad politics, corruption and mismanagement, on both micro and macro levels, have had a devastating effect on economic growth, Pals adds.
In Russia things are not much better – for obvious reasons. The country’s economy is bleeding, due to economic sanctions and the falling energy prices. “Investment is decreasing as is capex spending by oil majors. Consumer spending is weakening and inflation has hit double-digit levels,” says Pals. The equity market has become extremely cheap though, and if the ‘Minsk Two’ ceasefire holds, sanctions might be lifted this summer, which could trigger a rally in Russian stocks. However, the elimination of Boris Nemchov, a significant opponent of President Vladimir Putin, has once again shown how tense the political situation in the country is.
China and India are much better off at the moment, thinks Pals. “We like both countries and are cyclically and structurally positive on India, while China is structurally attractive, although there are some cyclical issues.” India has adopted a pro-business budget and President Modi’s reform program really seems to be taking off. The country is heading for 8 to 8.5% growths this year – more than China’s 7%.
Why limit yourself to four countries?
Robeco was one of the asset managers that did not launch a BRIC fund during its heyday. “We have never understood why investors should limit their emerging markets exposure to only four countries,” Pals explains. And certainly now, there’s still so much value to be found in other growth countries, such as those in Latin America.
‘We have never understood why investors should limit their emerging markets exposure to only four countries’
“The Andean countries – Peru, Chile and Colombia – as a combination have more to offer than Brazil, for example,” he says. “Peru is still very poor, but could lift off sharply once growth sets in. Colombia might profit from a ‘peace dividend’, when the war with FARC comes to an end, while Chile has a rich economy thanks to its copper resources.”
However, Pals thinks that Asia is more attractive at the moment. “The ASEAN countries have become very expensive, but we do see huge potential in both Indonesia and South Korea. The first has good demographic dynamics and a new president who is pushing for reform. The latter still has its traditional discount which makes it attractive for investors. In the long run this ‘Korean Discount’ will disappear once corporate governance further improves, dividend payout ratios rise and the growing number of active shareholders force companies to improve their ESG policy.”
So while BRIC no longer offers the winning formula it did in the past, plenty of other emerging countries are ready to take up the baton.
Head of Emerging Markets Equities