After the Brics, the real growth story

    3 October 2015

    As acronyms go, it wasn’t quite up there with Abba, named after the four founders of Sweden’s greatest export. For a recent coinage, however, ‘Brics’ has had a fantastic run. As a group of supposedly fast-growing countries — Brazil, Russia, India, China, with the tentative addition of S for South Africa — its turbo-charged potential obsessed the investment world for a half-decade after the financial crash. No portfolio looked competitive without a sprinkling of Bric superstars.

    But with China’s recent stock-market turmoil, and the underlying economic wobbles it highlighted, the Brics concept seems to have run out of road. Brazil has slumped into recession. India has positive features, but never really got off the starting grid in the way its supporters once thought it would. The collapsing oil price has revealed the cruel truth that Russia has made little economic progress since the fall of communism. As for South Africa, badly governed and on the verge of recession, it’s hard to know why it found its way on to the list in the first place, apart from supplying a useful plural for the acronym.

    And yet these disappointments may be no bad thing for investors. They can concentrate instead on where the real growth is coming from these days — the more solidly based economies of Poland and Hungary, the parts of Africa that are genuinely industrialising, and developing nations such as Vietnam and Mexico.

    ‘Brics’ was coined back in 2001 by the former Goldman Sachs economist Jim (now Lord) O’Neill. But the concept really took off with meetings of the Bric foreign ministers in 2006 in New York, and their leaders at Yekaterinburg in Russia in 2009. In truth, they were an odd group, with little in common except large populations and relative underdevelopment. That didn’t stop a new industry of investment gurus from gushing about their prospects.


    In retrospect, it’s not hard to understand why. In the wake of the financial crash, developed economies looked condemned to years of low growth. Burdened by massive debt, ageing populations and sluggish productivity, they were being kept alive by a dangerous drip-feed of quantitative easing. For better returns you needed to look elsewhere — and the high-growth Brics seemed to offer them.

    As it turns out, those returns were very disappointing. If you had invested in 2008 in the iShares Bric ETF, which tracks the 50 of the largest companies in the four countries, you would have done remarkably badly: from slightly over £20 a share, they now trade at around £14. You’d have been better off in a FTSE tracker.

    None of the Brics lives up to the hype. Russia is in deep recession. South African output slumped in the second quarter. Brazil’s economy is expected to shrink by 2.4 per cent this year. India is doing better, with forecast growth slightly over 7 per cent this year, but that’s below its government’s 8.5 per cent target. Meanwhile China, the most significant of the quintet, no longer looks able to sustain the soaring growth it chalked up for much of the last decade — and might actually be heading for a crash. Soon there’ll be nothing left of the Brics concept apart from some progress in India. And you can’t make a snappy acronym with only one letter.

    But blowing away the Brics froth allows investors to take a clearer look at economies that are genuinely growing. Eastern Europe has been overlooked in the rush to further-flung emerging markets. It’s a region of tortoises rather than hares — but as we all know, the tortoise wins.

    Hungary’s stock market was up by 20 per cent in the year to September. Poland’s dropped by only 6 per cent while emerging markets overall fell 19 per cent in the first eight months of 2015. There should be no real surprise about that. Poland is growing by 3.2 per cent this year, having sailed through the financial crisis, and Hungary is growing at 3.6 per cent. True, there’s plenty of manufacturing for western European multinationals underlying that growth. But that’s not likely to disappear any time soon.

    Elsewhere, Vietnam has reformed its economy and is growing fast. Among fast-growing parts of Africa, Kenya is one of the most stable markets. The Brics contained three resource-based economies and two politically unstable ones. That was never a great recipe for sustained growth, and certainly not for foreign investors to make money. We were naive, or gullible, to think it was. But there are some genuinely developing countries out there — and now they might at last win some of the attention they deserve.