Why You Shouldn't Buy BRICS Funds Anymore

The BRICS grouping of nations has captured the public imagination since first identified and set apart at the start of this century. These were five of the most exciting economies and markets in the world, countries that offered investors the prospect of above average returns for sustained periods of time.

But BRICS makes no sense in 2019. That's the implication of a new report to that effect from Standard & Poor's.

Why?

Simply put, the Asian BRICS nations (China and India) have been too good. Or the others have been too bad.

Either way, the five countries no longer share more similarities than differences. Investors would be better off focusing on China and India alone, or emerging markets in general, rather than buying any BRICS-focused funds.

There were of course only four nations in the original BRIC designation, as formulated by the then-Goldman Sachs economist Jim O'Neill. South Africa became the fifth nation at the end of 2010 on the invitation of the others, having long lobbied to get in.

The leaders of the BRICS nations formalized the grouping when they began meeting together, as they did for the first time in 2009. They went on to form the Shanghai-based New Development Bank to fund projects in the various countries.

The combined economic performance of the BRICS nations since 2001 justifies the halo of optimism that surrounded them as a concept. But it comes from two members rather than the grouping as a whole.

"Both China and India have maintained stable pro-growth economic policies for two decades, despite their very different political systems, and have gained a larger role in the world economy," primary credit analyst Joydeep Mukherji and the S&P research team write in their report. "In contrast, the comparatively poor long-term performance of the other three countries has diminished their global economic role."

The size of the BRICS relative to the world as a whole has in fact shrunk. The five nations made up 45% of world population in 2001; that has fallen to 42% as of 2018.

China and India have outperformed global growth since the BRICS concept formed. But Brazil, Russia and South Africa have underperformed the global average since then.

The five nations accounted for 18.7% of the world economy at the start of this century. The figure is now 32.7%, one-third of the world's economy in those five countries. But China and India alone make up 26.5% of world economic activity, or one-quarter. China has risen from 7.4% to 18.7% of global economic activity; India has climbed from 4.2% to 7.8%.

India is the poorest of the BRICS countries, with per-capita GDP of only US$1,923 per year, and annual income of around the same. But it has been the most-stable economically as a nation. Its credit rating was upgraded twice by S&P and has been steady since the financial crisis.

Despite any change in administration, India has pursued investor-friendly development strategies. These have sustained investor confidence and ensured persistently high growth. India has in 2019 surrendered and then recaptured pole position as the world's fastest-growing major economy, its 5.6% growth forecast for this calendar year due to rebound to 6.8% in 2020, according to Oxford Economics, and remain above 6.0% for the better part of the next decade.

China, with greater central control and a history of massaging the data, is due to see growth fall below 6.0% in 2020, to 5.7%, from 6.1% for this year. Its US$13 trillion economy can't increase at a breakneck pace anymore, although both India and China should be supported by rapid increases in consumer spending and the domestic economy.

One-party China has none of the democratic "distractions" experienced in the other BRICS nations. Regardless of the leader, the Communist Party dictatorship has maintained broad continuity and predictability in its economic policy, S&P notes.

Brazil and Russia have been far more volatile. In Brazil, periods of economic stress have been interspersed with business friendly, financially responsible governments such as that of now-imprisoned ex-president Luiz Inácio Lula da Silva. Lower commodity prices fed into policy mistakes made by former president Dilma Rousseff, and there's been a period of policy paralysis since that has done Brazil few favors.

Russia has been the most-unpredictable BRICS performer. It had a good run from 2000 through 2006, featuring strong industry and good oversight of public finances. High oil prices also helped.

The Russian economy was hit hard after the financial crisis in the West, contracting almost 8% in 2009. It also entered recession in 2014-15, as commodity prices took a turn for the worse. Oil and gas revenues alone still make up more than half of Russian exports. Now, despite a relatively stable patch in the economy, geopolitical tensions and sanctions raise the risk of further instability.

South Africa initially justified its ascension to the BRICS, with strong pre-financial crisis growth. But its economy contracted 1.5% in 2009, eked out narrow gains in the two-year period after that, and has now had a run since 2015 of declining GDP per capita. Poor economic performance has exacerbated poor government management of assets such as the power company Eskom, which currently can't keep the lights on nationwide. The huge debt ladled on the electricity company even drags down South Africa's sovereign credit rating.

Prospects look sunnier under current President Cyril Ramaphosa, who has come from a very successful career in the private sector to deliver some real-world ruthlessness in curbing government largesse. This year the South African economy will be near-flat, with growth of only 0.3%, according to Oxford Economics, but it should be close to 1% the year after and 2% and above from 2022 out.

Brazil and South Africa have not lived up to the economic aspirations that underpinned the concept of the BRICS nations, in the eyes of S&P. Brazil is actually, and surprisingly, less important to the world now than it was two decades ago. South Africa has struggled to shake the shackles of corruption and ineptitude in public circles. Russia has structural problems outside the energy sector and a volatile economy, coupled with a lack of imagination from its centralized decision making.

Investors in search of the optimism and turbo-charged growth that first dusted the BRICS with magic powder need look no further than China and India to find those attributes. The BRICS as a whole don't function as they should; two decades after they were formed, it's time to disband the concept in the public consciousness. It's to Asia that investors should turn for better prospects.

At the time of publication, Alex Frew McMillan had no position in the securities mentioned.