Investment spotlight turns away from the Bric economies

Michael Patterson and Victoria Stilwell

The Bric bloc of Brazil, Russia, India and China is falling off the investment map. The term for the bloc, where stocks gained 424 percent during the decade that ended in 2010, appeared in the fewest news stories last month since November 2008, according to data compiled by Bloomberg.

Bric searches on Google’s website fell to a seven-year low last December, while unit trusts that invest in the biggest emerging markets had outflows in 46 of the past 47 weeks.

Investor euphoria has turned into apathy after the Bric economies grew at the slowest pace since 2009 and the MSCI Bric index trailed world markets for a third consecutive year. The man who came up with the Bric moniker – Goldman Sachs economist Jim O’Neill – announced his retirement last 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 last week. He introduced the 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 might join the US and Japan as the world’s biggest economies by 2050.

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 (IMF).

Now, the four 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 Bric countries rose 4.2 percent on average in 2012, versus 3.2 percent for the world economy, the IMF estimated. The 1 percentage point gap would be the smallest since 1998.

The MSCI Bric index lost 9.2 percent from the end of 2010 to Thursday last week, 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 Brics had “now become unfashionable”, John-Paul Smith, an emerging markets strategist at Deutsche Bank in London, who predicted the underperformance of Bric shares in 2011, said last month.

O’Neill disagrees. Fading interest in the countries was a contrarian indicator that might foreshadow world-beating equity returns this year as China’s economy recovered, O’Neill said.

“It’s my hunch, because of China, that the Bric index will outperform,” O’Neill said.

The Brics risked undoing their achievements of the past decade by increasing the state’s role in markets, Nouriel Roubini, the chairman of Roubini Global Economics in New York, who predicted the 2008 financial crisis, said last month at the World Economic Forum’s annual meeting in Davos, Switzerland. The countries “have been hyped up too much”, Roubini said..

Equity gauges in Shanghai, Mumbai, Moscow and São Paulo that once moved in lockstep with the MSCI Bric index are losing their links to the benchmark. The 30-day correlations between the MSCI gauge and Brazil’s Bovespa, Russia’s Micex and India’s Sensex are at multi-year lows, and the Shanghai composite’s correlation hit a 12-month low last month.

“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 in New York, said last week. “Each one has a different investment climate, different issues.” – Bloomberg