On Tuesday, October 16th, Jim O'Neill of Goldman Sachs Asset Management noted that the BRICS (Brazil, Russia, India, China and South Africa) nations are very close to developing their very own multilateral bank. According to an article featured on Bloomberg.com,
The so-called BRICS nations have spent the year considering an Indian proposal for a multilateral bank that would be exclusively funded by those nations and finance projects in them. While the Chinese have been "scratching their head" about whether to support it, they may decide to if rich nations continue to prove slow in backing a shift in voting power toward emerging economies at the International Monetary Fund, O'Neill told Tom Keene at the Bloomberg Link FX Summit in London today. "The Chinese could jump ship," said O'Neill, who devised the BRIC term a decade ago.
If such a multilateral bank comes to fruition with Chinese support, investors may begin to flock into such exchange traded funds as the iShares China 25 Index Fund (NYSEARCA:FXI) or the iShares MSCI Hong Kong Index Fund (NYSEARCA:EWH). If such a multilateral bank comes to fruition without Chinese support, investors may flock more toward exchange traded funds focused on Brazil and Russia such as the iShares MSCI Brazil Index Fund (NYSEARCA:EWZ) and the Market Vectors Russia ETF (NYSEARCA:RSX).
An indication of where China stands on the issue was recently featured in an article found on the Hindu.com,
Officials in China's banking regulatory authority and Export-Import (EXIM) bank have indicated their backing to push forward a BRICS development bank, but have voiced caution at recent moves to accelerate setting up the body ahead of next year's Durban Summit". In my opinion, if China decides to exclude itself from such a multilateral financial institution, it wouldn't be such a bad thing considering the fact that the country continues to grow at pretty considerable pace at many investor's will see when the country reports growth numbers later in the week. Mr. O'Neill also noted that, "economic growth has slowed to 7.4 percent in the third quarter, according to the median estimate of a Bloomberg News survey of economists. That would be the weakest annual pace in three years.
7.4 percent is pretty impressive since the US hasn't demonstrated anywhere near that amount in the last three years.
With regard to the Chinese-based ETFs, EWH is up 20.40% for the year whereas FXI is only up 1.71%. In terms of Brazil and Russia, EWZ is trading down 3.86% on the year and RSX is trading up just over 8.00% since January 1st. If such a bank is formed in the next 12 to 24 months, ETFs such as FXI and EWZ could see a pop given the would-be liberal nature of a BRICS bank versus the World Bank.
Although Mr. O'Neill hints at the possibility of China jumping ship, I highly doubt such an event would occur. Why? Simply because such a multilateral bank would in assist in certain types of projects the World Bank would not. According to Henry Mance of FT.com,"the bank could finance projects - such as biofuels, large dams and nuclear power plants - that do not meet the World Bank's environmental and social standards".
How should investors play the idea of such a bank? In my opinion small to medium sized positions should be established in such Emerging Markets ETFs as FXI, EWH, EWZ and RSX. I'd be a bit more cautious on such ETFs as FXI and EWH since economic growth has been slowing in China and a bit more aggressive when it comes to such ETFs as EWZ as Brazil recently implemented a stimulus package and RSX as Russia has outpaced the growth of many of the G7 nations.