No BRIC without China

September 17, 2012

Jim O’ Neill, creator of the BRIC investment concept, has been exasperated by repeated calls in the past to exclude one or another country from the quartet, based on either economic growth rates, equity performance or market structure. In the early years, Brazil’s eligibility for BRIC was often questioned due to its anaemic growth; then it was the turn of oil-dependent Russia. Over the past couple of years many turned their sights on India due to its reform stupor. They have suggested removing it and including Indonesia in its place.

All these detractors should focus on China.

China’s validity in BRIC has never been questioned. Aside from the fact that BRI does not really have a ring, that’s not surprising. China’s growth rates plus undoubted political and economic clout on the international stage put  it head and shoulders above the other three. And after all, it is Chinese demand which drives a large part of the Russian and Brazilian economies.

But its equity markets have not performed for years.

This year, Russian and Indian stocks are up around 20 percent in dollar terms while China has gained 9 percent and Brazil 3 percent. In local currency terms however China is among the worst performing emerging markets, down 5 percent. Brazil has risen 9 percent.

Over the past five years, MSCI China. which makes up 40 percent of the BRIC index, has lost 18 percent, Thomson Reuters data shows.  That has pushed the broader BRIC into a negative return of almost 10 percent in this period.

The BRIC equity losses and BRIC funds’ poor returns are now causing many to question the validity of the BRIC concept itself, a topic we explored in this recent article.  But clearly the problem with BRIC equities lies with China and as the economy slows, more losses are likely in the short-term.  The Shanghai market has taken little cheer from the Fed’s money printing-announcement, focusing instead on falling property prices locally and potential problems at Chinese banks.

So what is a BRIC fan to do? One way is to ditch the MSCI index and go instead for an equally-weighted BRIC index, says Bill Maldonado, head of equities at HSBC Global Asset Management. An equally-weighted BRIC benchmark has performed on par with MSCI emerging markets, he says.

The other option of course is to wait. Morgan Stanley forecasts the Chinese market will recover — the bank predicts a 22 percent rise in 2012 for MSCI China.

And ultimately, as Goldman Sachs points out, BRIC is a long-term investment thesis.  In a note out this week, O’Neill says the market needs to stop thinking of China as a 10-percent growth market or that a new infrastructure project will be unleashed to save the day. Instead, he notes robust 13 percent retail sales growth (in contrast with weak manufacturing numbers) , a sign of the more balanced China of the future.

“We are in the early days of a ‘new’ China which is all about ‘quality’ and not ‘quantity’,”  O’Neill writes.


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