BRICs – a ridiculous investment concept? It depends how you look at it.

16th January 2013

Albert Edwards, a strategist at Societe Generale, has hit out the idea of the BRICs – Brazil, Russia, India and China as a ‘ridiculous investment concept’. He also queried whether stock market growth really follows economic growth.

Now M. Edwards does not mince his words when it comes to many things and at Mindful Money we applaud that.  His comments are reported in trade paper Investment Week.

But is he correct and does that mean that Goldman Sachs economist Jim O’Neill, who coined the term, was wrong to do so?

Mindful Money thinks there are two ways to approach this.

Approach one

The BRIC term may just be a four-letter acronym, but it has proved an extremely powerful one to describe the shift in global economic power and trade. For any investor the idea of the BRICs has to be a factor not least because the influence of these countries is immense. It doesn’t mean you should necessarily be investing directly. It does mean you should consider their influence as a competitive threat to Western firms, as a market for products (see luxury goods for example) as their consumer base grows and as a driver and/or supplier of commodities. The BRICS are part of this economic thinking.

Where it might become misleading is where these four are seen as the only driver so are viewed as some sort of group that will behave in a very similar way. Indeed, if anything all these countries have diverged wildly in their economic and political fortunes. There is also a risk that other countries could be excluded.

Approach two

You could argue that the BRIC concept has led people to focus exclusively on these markets with various BRIC funds on offer. Though a BRIC fund will not necessarily exclude the others markets it will have a considerable amount invested there.

In addition, BRIC funds may not, for example, have done as well as global emerging market funds. There has also been a suspicion that some fund managers have been launching ‘me-too’ funds as well.  Then again that doesn’t mean BRICs won’t do better at some stage. China’s stock market has had a pretty difficult time since the financial crisis despite its reasonable economic performance illustrating M. Edward’s second point. They key, we think, is to know what you are investing in, what a fund invests in regardless of what it says on the label and how that fits with your own attitude to risk.

So the BRIC acronym is a useful term. It may help you test your investment decisions. But be careful you don’t simply buy the markets concerned because of their share of global GDP. Given their profile It doesn’t necessary equate to liquid, investable shares.

Our conclusion

Therefore M. Edward has a strong point to make. Mr O’Neill was perfectly within his rights to coin the term. Use it as food for thought when making your investment decisions. But it certainly isn’t a command to get exposure.

By the way, O’Neill has a new book out called the Growth map marking ten years on since he coined the term. We bet it’s worth the read wherever you stand in the debate.  

 

14 thoughts on “BRICs – a ridiculous investment concept? It depends how you look at it.”

  1. Just a thought says:

    Hi Shaun,

    Should I remind that Angela Merkel is a trained Scientist and Francois Holland taught economics in one prestigious French University? He is a man who definitively should know what it is good for the French economy. So what could go wrong???

    1. Anonymous says:

      Hi Just a thought.

      Only just about everything! More seriously conventional economics has failed in places well beyond the borders of France…

  2. DOW says:

    What do the Eurozone figures look like if the German stats are excluded ? I suspect that the results in most of the other economies are static at best.

    1. Anonymous says:

      Hi DOW and welcome to my part of the blogosphere

      Sadly we do not get an PMI readings for the Euro area which exclude Germany but we did get a paragraph of analysis.

      “Outside of France and Germany, the rest of the region saw business activity rise for the seventh consecutive month. The rate of increase dipped slightly but remained close to the near-three year high seen in January. Growth of new orders hit the highest for three years, but employment and selling prices fell once again. Expectations in the service sector about the year ahead remained elevated, but eased to a four-month low.”

  3. Anonymous says:

    Hi Mike,

    There is a large difference between SME costs in France and Germany. I’d suggest this helps to explain high unemployment in France, whilst German firms are adding jobs and sucking immigrants from all over Europe.

  4. britIndian says:

    Taxes are aactually significantly lower in france, for all but the top 1%. They also increase the slabs at which higher tax is due if you have more children. This high income tax argument with regards to france is badly informed

  5. Anonymous says:

    Hi Mike

    It seems that France is slipping backwards against a weak peer group. What I mean by that is that there is a high degree of danger that Europe as a whole is in secular decline. I fear we (I include the UK in this) may decline back to it rather than it recover to us.

    If I put a more optimistic hat on then France does not seem well equipped for the information technology sector which may be a way out.

  6. Anonymous says:

    Hi britindian and welcome to my part of the blogosphere

    According to the OECD the tax wedge (% of labour costs) for a single person is 49.8% in Germany and 49.4% in France. But a family with one earner and 2 kids sees Germany drop substantially to 34% whereas France only drops to 42.3%.

    So it depends on circumstances but families seem to pay lower taxes in Germany.

  7. Britindian says:

    If you analyse the numbers in more detail, you will see that the largest proportion of the tax wedge is employer paid tax, not income tax.

    Industry in france is uncompetitive due to employer taxes not income tax, though one could argue that this is the only effective way to obtain tax from corporates

  8. Anonymous says:

    Taxing business into bankruptcy will not effectively collect tax over the medium to long term. It’s called killing the goose that laid the golden egg.

  9. therrawbuzzin says:

    It’s iron pyrite if society doesn’t benefit.

  10. Anonymous says:

    If you want existing businesses to thrive and to attract new businesses, it helps to create a business friendly environment. It’s important because business creates wealth and employment.

    The contrast between French and German unemployment is clear. German society is benefitting from high employment and taking reasonable taxes, where the French are suffering from higher unemployment.

    The British bank subsidies are an example of failing businesses costing society – I’d call that iron pyrite …

  11. therrawbuzzin says:

    If business doesn’t benefit society, then it’s of no interest to me; why would it be?
    To me that’s the crux, if we have a huge GDP but huge swathes of the workforce on poverty wages, zero hours contracts and the like, needing to be subsidised by the benefits system, then I won’t shed a tear if every business like that goes to the wall.

  12. Anonymous says:

    Maybe you should ask some Eastern Europeans what it’s like when every employer simultaneously stops employing people …. just like 1991

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