Image source: Visual Capitalist
https://www.visualcapitalist.com/visualizing-the-brics-expansion-in-4-charts/
Are BRICS the place to be invested?
Often as investors our focus is on major developed economies. However, be it in a bespoke wealth management portfolio or a Kiwisaver Scheme fund; part of having a robust and resilient diversified investment portfolio is to include developing economies. They play a meaningful part in a sound investment portfolio.
Let us look at BRICS as a case in example. Formed in 2010, the BRICS organisation exists to promote cooperation among major emerging economies – Brazil, Russia (though most investors will rightly avoid this now), India, China, and South Africa.
In 2024 this economic block is looking to grow. The BRICS countries have been discussing the possibility of creating a joint currency. And while this idea reflects their desire to reduce reliance on the U.S. dollar, it faces significant challenges:
De-dollarisation Momentum: With 88% of international transactions conducted in US dollars and the dollar accounting for 58% of global foreign exchange reserves, the dollar’s dominance is indisputable.
However, de-dollarisation efforts have accelerated due to geopolitical shifts and sanctions on Russia. The BRICS nations have been exploring alternatives to the dollar in cross-border transactions, including greater use of non-dollar currencies and diversifying their reserves away from the dollar.
Hurdles Ahead: Despite the discussions, a new BRICS currency faces hurdles before becoming a reality. Challenges include coordinating policies, addressing economic disparities among the member countries, and gaining global acceptance. The US dollar’s entrenched position remains a formidable obstacle.
Focus on Innovation: Beyond currency discussions, the BRICS bloc aims to reshape the international system through innovation and coordination. While removing the US dollar may be difficult, their efforts signal a growing challenge to the established economic order.
Whilst it may be said a BRICS currency won’t displace the US dollar as a trading currency anytime soon, it reflects the bloc’s determination to explore new ideas and assert their influence in global affairs.
Each BRICS country has its strengths and challenges: Brazil is a major producer of coffee, soybeans, and sugarcane; but it also faces economic volatility and structural issues. India, an agricultural giant of rice, wheat and tea, has emerged in recent times to challenge China’s top spot in Emerging Markets Equity Portfolios with economic reforms attracting foreign investments and improved competitiveness.
From a purely observational standpoint (reputable firms will not hold Russian assets; we divested before Russia’s most recent war with Ukraine, and the mass divestments after was something to behold), Russia holds vast energy reserves and dominates oil and gas exports but is sensitive to geopolitical tensions.
The BRICS countries collaborate in many ways to promote cooperation among their major emerging economies with the objectives including enhancing economic growth, addressing shared challenges, and fostering dialogue on global issues.
Annual Summit: BRICS members hold an annual summit where they set priorities and make decisions. Each country takes turns serving as the group's president for a year.
New Development Bank (NDB): Established in 2014, the NDB provides loans to boost infrastructure projects in emerging nations. It has already provided nearly $32 billion for roads, bridges, railways, and water supply initiatives.
Strategic Partnerships: BRICS countries prioritise building strategic partnerships. They coordinate macroeconomic policies, address healthcare and trade, and collaborate on food security and climate change.
Market Access and Trade: The revised Strategy for the BRICS Economic Partnership aims to enhance intra-BRICS economic interaction. It facilitates market inter-linkages, promotes mutual trade and investment, and supports value addition.
So, are BRICS a suitable place to be invested?
Yes, as part of a well-managed diversified investment portfolio. By and large, depending on the investor’s goals and risk tolerance, some 5% to 15% of a client’s investment portfolio may be invested in Emerging Markets (EMs).
The premise of investing in EMs (like BRICS) is that their GDP will grow faster than Developed Markets (DMs), thus the performance of companies and overall markets will be greater than DMs. However – higher potential reward means higher risk. Because they do carry more risk, you would be best not to make your sole focus BRICS / EM.
That is not to say that once a market becomes a DM, it is safe. For all that German equity markets were well-developed by the end of the 19th century, hyperinflation and subsequent counterproductive interventions back in 1920s Nazi Germany destroyed the German stock market during the 1930s. This effectively wiped out Austrian and German shares in the ‘30s-‘40s, which had previously been quite fruitful.[i]
When it comes to EMs – or even just trying to avoid the companies from DMs that fund controversial projects – you can opt for a structure using a sustainability overlay when setting up your portfolio. A sustainability overlay goes some way to removing unwanted association with “nasties” that can be part of EMs (e.g. Russian equities). Not all filters are equal, so be sure you are working with a trusted team who can prove where your funds are (or more importantly, are not) invested.
There is plenty of nuance that goes into building a robust portfolio, but all this to say – if you see a smallish percentage of BRICS in your portfolio, don’t worry. They are (or should be) just a few of the many blocks that make up your investments.
If you are concerned, or would like a second opinion on the structure of your investments, get in touch with your local fiduciary adviser for a face-to-face chat.
by Bruce Jenks (Financial Adviser at Stewart Group)
· Bruce Jenks is a Financial Adviser at Stewart Group, a Hawke's Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 368.
· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] Burhop, Chambers & Cheffins: “The Rise and Fall of the German Stock Market, 1870-1938” (Camridge Working Papers in Economic and Social History: Working Paper No. 25 – 2016).
