Chart of the Week: Are the BRICs Breaking Down?
BRIC correlation with the emerging markets universe is rising, fueling criticism of the decade-old strategy.
For more than a decade, the idea of the BRICs – four emerging market powerhouse nations – has been one of the hottest, most buzzed-about investment concepts and attracted billions of dollars from both institutional and individual investors.
Now, the concept is drawing as much criticism as it once attracted fans. The theory is still appealing: that these four countries, all boasting above-average economic growth rates; most offering increased prosperity and a growing population, could form a de facto economic bloc equivalent in importance to Europe or the United States.
In practice, however, investing in the group has seemed to offer fewer advantages than it once did, as the differences between its members loom larger. Brazil and Russia are both vulnerable to global commodity prices; growth in Brazil has flatlined. China has continued to grow, albeit at a less torrid pace in recent years – but its volatile stock markets have left investors with a loss for the last two decades despite that growth. India struggles to realize its full potential.
Above all, as shown in this week’s Chart of the Week, investors must grapple with the fact that the BRIC phenomenon no longer appears to offer any meaningful diversification.
Back in 2002, shortly after Goldman Sachs strategist Jim O’Neill coined the phrase, BRIC markets’ correlation with other emerging markets was only 0.4. Over the last 12 months, these four economies have generated returns that are far more in line with those of their peers in the emerging markets, and the correlation has soared to 0.88. That has led critics to suggest that it’s far better to seek out the best companies in all emerging markets than it is to try and assume that a distinction that once was able to generate profits will remain in place indefinitely.
For more insight into the way institutional investors are rethinking the implications of this data for their strategies, please see this Reuters News article.
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