The 'BRIC' Acronym Makes No Sense

Almost all do-it-yourself investors who are reading about emerging markets would be aware of BRIC acronym. BRIC stands for Brazil, Russia, India, and China. This BRIC label clubs four distinct emerging markets into a single entity. Based on this labeling, there are many different mutual funds, closed-end funds, and ETFs.

What is ironic is there is very less similarity among these countries except that they are supposed to be the new growing economies. Each of these countries have different governance structure, different governance policies, different types of economies, different strengths, different financial markets, different values, etc.

Even with these differences they are clubbed together and viewed as single entity for investing in emerging markets. This is again one of the follies of Wall Street investment firms. To top it off, GS and other investment firms seems to have more lenient bent towards China’s market among the BRICs. Is this because these firms get more business in China? I am not sure if there is an open answer to this one. But clubbing all these countries under BRIC acronym does not make sense to me.

Russia and China seem to have similar ambitions of having a dominant say in world affair, be militarily or economically. However, both seem to be following different paths to reach there. Russia wants to go military way using its natural resources (particularly oil), with scant regards for its own population. How about Russian democracy? We all know its democratic governance (pun intended)! Without oil, its economy seems to flatter.

China seems to be attempting the path of economic leverage to have its dominating standing in world affairs. It is happy engineering numbers for its advantage. Democracy in China is non-existent.

Ironically, we in US want to establish democracy in Arab countries, but happily gloss over at China’s democratic record. China’s export oriented manufacturing economy is quite different than Russia’s oil economy. China’s cheap exports contribute one third to its $4T GDP, while Russia’s exports contribute to one fourth to its $2T GDP. Can Russia and China be clubbed? Are their financial markets open enough for investors?

On the other hand, Brazil and India does not seem to aspire for dominance in world affairs. Both of these countries are perhaps only looking for recognition and say in world affairs. Brazil economy seems to be driven by natural resources, demographics, and internal consumption. Similarly, Indian economy is driven by its demographics and internal consumption. Brazil’s export contribution is less than 10% to its $2T GDP, while India’s export contributes less than 15% to its $1.2T GDP.

Furthermore, Brazil and India follow a democratic governance which on many occasions slows down decision making, but provides better transparency to some extent (relative to Russia and China).

Which one would you choose; uncertainty of bad or good in China/Russia and attempting to manage risk; or knowing bad habits of Brazil/India and entering with risk management?

As you can see, there are fundamentally significant differences in BRIC nations. In my opinion, there is no way one can club these countries together. This is once again a concept purported by financial firms to sell their fund-based products. This BRIC label does not have any fundamental basis other than emerging markets. There are thousands of companies in all four economies, and clubbing all together to preparing a representative fund of few tens, or few hundreds does not make sense to me.

Also, the idea that one can capture and hedge by investing in BRIC based funds is something that I cannot understand.

Investors interested in emerging markets should be: (a) looking at countries on individual basis; (b) using individual ETF based investment vehicles; and (c) maintaining allocation according to risk appetite.

On a personal front, I am interested in Indian markets for its sustainability and hence use WisdomTree’s EPI as an investment vehicle. In addition, my maximum target allocation for emerging markets is 8% or less.

Full Disclosure: Long on EPI

Comments

[Graham and ...:]

They have one other thing in common. There are only five countries in the world of "Continental" size. That is, 100 million or more people AND 1 million or more square miles. (Countries like Australia and Japan qualify on one or the other, but not both.) The five countries are: Brazil, Russia, India, China--and the United States.

Jul 23 11:24 AM

[notsosmart:]

its your money.if you want to trust it in china or russia-good luck. these countries have have goalposts on wheels & they move as it benefits them.we even have wobbly poles here.

Jul 23 01:50 PM

[old guy:]

B(no Russia)IC made me a lot of $$$$ say what you want !

Jul 23 11:11 PM

[Alan Young:]

What you say about the "BRIC" label is absolutely true, and thanks for pointing out some key data about these economies.

That said... If you are only putting 8% of your portfolio into EMs, it doesn't matter much how you slice it. So I wonder why you bothered.

For those of us who want more beta, an allocation of 20-30% to this sector is reasonable--that's where the growth is. And then, the distinctions you make do matter, a lot. In addition to the big 4, other important markets to consider are Korea, Taiwan, Singapore (considered "developed" by some measures); South Africa, Indonesia, Mexico, and Chile.

Jul 24 04:03 PM

[Ben Gee:]

The Bric countries have the following in common:
1. They each has a huge population.
2. They each has large land mass.
3. They are rich in both human and natural resourses.
4. They all have huge potential for future developments.
5. They are under represented in world affairs.
6. Until lately, they had almost no respect. Except China, they still do not.
7. They all want their rightfull place in world.
8. Together, they are a force. Each alone, they have little voice, except China now.
They have a lot more in common than some think.

Jul 25 10:25 AM