)
The term for Brazil, Russia, India and China, where stocks gained 424 per cent during the decade ended 2010, appeared in the fewest news stories last month since November 2008, according to data compiled by Bloomberg. BRIC searches on Google Inc’s website fell to a seven-year low in December, while mutual funds that invest in the biggest emerging markets had outflows in 46 of the past 47 weeks.
Investor euphoria has turned into apathy after the four economies grew at the slowest pace since 2009 and the MSCI BRIC Index trailed world markets for a third straight year. The man who came up with the BRIC moniker — Goldman Sachs Group Inc’s Jim O’Neill — announced his retirement this week.
“It looks like investors, certainly the trend-following types, have lost interest,” O’Neill, who will step down as chairman of Goldman Sachs’ asset management unit this year after about 18 years at the New York-based bank, said in a February 5 phone interview.
O’Neill, 55, introduced the BRIC concept in a 2001 research report predicting that the countries’ share of the global economy would increase. His colleagues at Goldman Sachs estimated two years later that the nations may join the US and Japan as the world’s biggest economies by 2050.
‘Like a brick’
The bullish outlook proved prescient as the BRIC countries grew at an average annual pace of 6.6 percent from 2001 to 2010, almost twice as fast as the global economy, according to the International Monetary Fund in Washington. China is now the world’s second-largest economy in dollar terms, while Brazil is No. 7, Russia is No. 9 and India is No. 10, IMF estimates for 2012 showed in October.
Goldman Sachs’ prediction helped unleash a flood of money into the BRIC countries. Investors poured about $15 billion into mutual funds that buy stocks in all four nations, along with another $52 billion into funds dedicated to individual members of the group, from 2001 through 2010, according to Cambridge, Massachusetts-based research firm EPFR Global.
The name stuck. Investors “wanted something that was simple,” Christopher Palmer, who oversees about $2.5 billion as the London-based director of global emerging markets at Henderson Global Investors Ltd, said by phone February 5.
“BRIC is a nice marketing concept, and it sounds quite solid, like a brick.”
Slowing growth
The MSCI BRIC index’s 424 per cent return through 2010, including dividends, compares with a 44 percent gain for the MSCI All-Country World Index and 350 per cent for the MSCI Emerging Markets Index. That means $10,000 invested in the BRICs grew to about $52,400 during the period.
Now, the nations’ shares are lagging behind as their economic growth advantage shrinks and investors shift money to smaller emerging markets, including Turkey and the Philippines. Gross domestic product in the BRICs probably increased 4.2 per cent on average in 2012, versus 3.2 per cent for the world economy, according to the IMF. The 1 percentage point gap would be the smallest since 1998.
The MSCI BRIC index lost 9.2 per cent from the end of 2010 through yesterday, compared with a 2.4 percent slide in MSCI’s emerging-market index and a 13 percent advance in the MSCI All- Country gauge. The four-nation measure is up about 2.2 per cent this year, versus a 4.3 per cent increase in the global index.
O’Neill bullish
The BRIC gauge slipped 0.1 per cent at 6:07 am in London, heading for a fifth day of declines, the longest stretch since November 16. The measure is down 2.3 per cent this week.
Brazil, Russia, India, China and BRIC funds have recorded combined outflows of about $8.3 billion since 2010 even as those investing in global emerging markets had inflows of $70 billion, EPFR Global data show.
The BRICs have “now become unfashionable,” John-Paul Smith, an emerging markets strategist at Deutsche Bank AG in London who predicted the underperformance of BRIC shares in 2011, said in a report e-mailed January 24.
O’Neill disagrees. Fading interest in the countries is a contrarian indicator that may foreshadow world-beating equity returns this year as China’s economy recovers, he said.
“It’s my hunch, because of China, that the BRIC index will outperform,” O’Neill said by phone from London.
Relative value
The Shanghai Composite Index has climbed 6.6 per cent this year as consumer purchases support a rebound in economic growth. China’s expansion accelerated in the fourth quarter for the first time in two years, with GDP increasing 7.9 per cent from a year earlier, according to the National Bureau of Statistics in Beijing. Retail sales climbed 15.2 percent in December.
Low valuations are another reason to be bullish, O’Neill said. The MSCI BRIC index trades for 10 times reported earnings, versus 16 times for the MSCI All-Country gauge. The 36 per cent discount for the BRIC measure compares with an average gap of 24 per cent since Bloomberg began compiling the data in July 2009.
“They trade at a significant discount, certainly to their own past,” O’Neill said. “The key part of the BRIC story, the C, which is the same size as the other three put together, seems to me to be even stronger than ever.”
The BRICs risk undoing their achievements of the past decade by increasing the state’s role in markets, Nouriel Roubini, the chairman of Roubini Global Economics LLC in New York who predicted the 2008 financial crisis, said in a January 25 interview at the World Economic Forum’s annual meeting in Davos, Switzerland. The countries “have been hyped up too much,” Roubini said.
Petrobras tumbles
In Brazil, the government fixes energy prices to rein in inflation, which has exceeded the 4.5 per cent midpoint of the central bank’s target range for more than two years. That means fuel imports have curbed earnings at Petroleo Brasileiro SA, Brazil’s state-run oil producer, as it pays more for gasoline and diesel bought abroad than it charges distributors.
While the government authorised a fuel price increase on January 29, the adjustment trailed analysts’ estimates and voting shares of the Rio de Janeiro-based company dropped 5.1 per cent the next day. Petrobras tumbled 8.3 per cent on February 5 to the lowest level since August 2005 after saying that it will reduce dividends.
Brazil’s benchmark Bovespa Index has declined 4.2 per cent this year through February 7 and is down 16 per cent since the end of 2010. The BSE India Sensitive Index has gained 0.8 per cent in 2013 and Russia’s Micex Index has increased 3.5 per cent.
Fading links
The number of news stories containing the term BRIC fell to 317 in January, according to data compiled by Bloomberg from more than 100 news sources. That’s 87 per cent less than the record high in March 2011, a week before the MSCI BRIC index reached an almost three-year peak.
Google, operator of the world’s most-popular search engine, had the fewest queries on BRIC in December since February 2005. While the level of interest has since increased, it’s still about 17 per cent lower than a year ago and 48 per cent below the June 2009 high, according to Google’s Trends website.
Equity gauges in Shanghai, Mumbai, Moscow and Sao Paulo that once moved in lockstep with the MSCI BRIC index are losing their links to the benchmark.
The Shanghai Composite’s 30-day correlation with the MSCI gauge dropped to 0.2 on January 9, the lowest level since January 2012, from as high as 0.8 in September, data compiled by Bloomberg show. A reading of 1 means two markets move in tandem, while a level of -1 means they move in opposite directions.
The relationship for India’s Sensex declined to the lowest level since November 2009 this month, while the reading for the Micex reached a four-year nadir. The Bovespa had the weakest correlation since March 2008 in October.
“People aren’t talking about them as a group any more, but talking about the countries separately,” Timothy Ghriskey, the chief investment officer at Solaris Group LLC in New York, which manages about $2 billion and has equity holdings in India and Brazil, said by phone on February 5. “Each one has a different investment climate, different issues.”
