Brics: How not to build an investment bloc


9 Feb 2024

An increase in membership points to Brics looking at becoming an investment and political bloc to rival the G7. But, as Andrew Holt finds, there is a lack of excitement for the idea.


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An increase in membership points to Brics looking at becoming an investment and political bloc to rival the G7. But, as Andrew Holt finds, there is a lack of excitement for the idea.

In August last year, Brazil, Russia, India, China and South Africa – collectively known as the Brics group of emerging economies – agreed to admit new members into their club. Egypt, Ethiopia, Iran, Saudi Arabia and the UAE have since increased the size and influence of the bloc, with Argentina withdrawing its planned entry into the bloc.

Collectively, they have established something of a potential financial and political powerhouse: accounting for 47% of the world’s population and 37% of global GDP.

Will this group, therefore, as many of its members hope it will, challenge the G7 nations? And more importantly, what will it mean for investors – do these countries look more appealing and stronger than they did as disparate nations?

The investor votes are in, and it looks like nul points for the new-look Brics. “We don’t think membership of Brics will elevate the investment attractiveness of these economies,” says Michael Langham, emerging markets analyst at Abrdn.

“Only if membership leads to credit lines between members or increased investment to address critical infrastructure needs could this be viewed as generating a more attractive investment proposition,” he adds.

Thierry Larose, portfolio manager at Vontobel Asset Management, is equally unimpressed. “From an economic and financial perspective, Brics is far from being relevant as a bloc, with the exception of a few scattered initiatives like the New Development Bank. For investors, this means that Brics members will continue to be assessed on their own.”

A weaker proposition

When it comes to assessing the new joiners, the case for Brics gets weaker, not stronger, Larose says. “We believe that they will not change the existing situation. Argentina is in the middle of a deep economic crisis and is no longer interested in joining the alliance,” he says. “Egypt and Ethiopia are in a state of quasi bankruptcy. Iran is another pariah state. Saudi Arabia and UAE have neither the incentive nor motivation to cut the economic ties with the West. Their objective is to grow and prepare their transformation for the post-hydrocarbon era.”

Put like that, Brics sounds deeply unappealing.

Langham also presents a scenario where Brics creates a situation which is opposite of its aims. “If Brics becomes a forum which increases investor perceptions of a fracturing international order, international capital flows could dry up, amplifying domestic challenges and potentially generating a negative feedback loop,” he says.

And for Maria Negrete-Gruson, portfolio manager in the sustainable emerging markets team at Artisan Partners, the new Brics breaks the fundamental attraction of the component countries from an investment viewpoint.

“Expansion of the Brics framework does not sway our investment perspective, and we believe our sentiment resonates among emerging market investors,” she says.

Her point is that a fundamental aspect of emerging markets as an asset class is the diverse exposure to countries in various stages of development.

“We believe that any grouping of a select few emerging market nations goes against the concept of diversification, and it will end up harming investors and the broader economic development of emerging markets,” she says.

Expanding further, Negrete-Gruson adds: “Brics has become a misguided idea that size is the overriding determinant of emerging market performance.”

Great collaboration

But Jason DeVito, lead portfolio manager in emerging markets  debt at Federated Hermes, offers a more upbeat picture. “The group’s expansion will lead to greater economic collaboration amongst a larger swath of the emerging market world. Longer term, this will provide more bilateral trade flows, technological exchange and less dollar dependency,” he says.

This could create a wider variety of investment opportunities in the emerging market space, DeVito says.

“We expect enhanced investment opportunities to result from the expanded Brics, and greater opportunities may arise to participate in infrastructure investments which are supported by the wealthier Brics countries in the less wealthy Brics countries,” he says.

Here DeVito points to Saudi Arabia and the UAE, which over the past few years have invested heavily in other emerging markets. “Particular areas of focus have been in agriculture, manufacturing and the tech sector, all of which are areas where the oil-rich region has tended to be laggards in,” he says.

Langham also highlights how Brics could challenge the G7 countries in investment terms. “Given China, UAE and Saudi Arabia have large reserves and sovereign wealth funds, this could see funding diverted away from G7 economies to Brics members,” he says.

But for Langham, more fundamental factors for institutional investors will prevent them from moving capital from the G7 en masse. “Fundamental reasons for investment flows into the G7 are the economies’ open capital markets and strong institutional quality, which reduce the risk of investing. Brics is unlikely to challenge these fundamentals as a group.”

A pariah and a giant

Building on the idea that investing in Brics is risky business, while also giving little credence to Brics as a cohesive bloc, Larose identifies the strengths and weaknesses of its component parts – with a bigger emphasis to be found on the latter.

“Brazil is a commodity powerhouse with chaotic internal politics,” he says. “Russia is a pariah state finding itself more dependent than ever on hydrocarbon resources to nance its military-industrial complex,” he adds.

“India,” Larose says, “is a rising giant that has neither incentive nor motivation to sacrifice its economic ties to the West in order to please its eternal rival China.”

And China “is a gigantic recycling machine, transforming what they buy from their Brics allies to cater for the West consumption needs”.

Adding on China, Larose says: “There is the issue with Taiwan, which could make China the next pariah state.”

And South Africa he describes “as a social-economic time bomb, where inequalities and an inability to grow never let the nation recover from the dark times of apartheid”.

But the problem with Brics doesn’t stop with such a gloomy assessment. There are further stumbling blocks in presenting Brics as a new political and investment panacea.

Brics reject

The first issue comes in the form of Javier Milei, the new prime minister of Argentina. His libertarian views mean he looks to the West, not to Brics, as the way forward.

Milei has rejected Brics membership, advocated a dollarisation of the country’s nances, albeit something he has not acted upon at the time of writing, but pitching him rmly against the narrative of the Brics.

If he persists in this, as seems he will, how much will it undermine the whole Brics power project?

“Milei’s rejection of Brics membership shows that the group may struggle to position itself as a voice for the global South,” Langham says. “Members have competing geopolitical aims and Brazil, India and South Africa have pushed back on the group being seen as a direct challenge to the West.”

But DeVito sees positives for Argentina and Brics from an economic and investment standpoint. “Milei is looking to take a more fiscally responsible and investment-friendly economic approach to managing the Argentinian economy. So, an improved Argentinian economic environment will encourage much needed outside investment in industry and infrastructure,” he says.

There can be no doubt that what plays out in Argentina – given the unpredictability of Milei – and its impact on Brics, will be interesting to see.

Democrats and autocrats

The second, and probably more fundamental, reason that Brics will not advance in an upward power trajectory is the uneven political nature of the Brics countries. They range from democracies to autocracies, something which is likely to undermine Brics as an effective investment bloc.

Larose agrees with this premise. “Political contexts and economic conditions are just too heterogeneous to envisage any kind of union at the trade level let alone at the monetary level. The only common denominator those countries have is the will to challenge the leadership, hegemony of the West,” he says.

An argument shared by Langham. “While there are clear common goals amongst Brics members of increasing their geopolitical clout, reshaping and challenging existing global institutions and practices, and reducing their use of the US dollar, it would be a mistake to view members’ geopolitical aims as homogenous,” he says.

The Financial Times has reported that some members, particularly India and Brazil, have been unhappy with the anti-western rhetoric of China and Russia in meetings. Such cracks could create a chasm.

Langham nails this down further. “In India’s case, there are concerns that the group is a vehicle for China to expand its influence. The expanded membership will add further complexities and likely limit the potential for any major initiatives to emanate from the group,” he says.
 Larose is more overt in his analysis, believing that China is the power behind the Brics’ throne.

“The expansion of the alliance was a China-led initiative aiming to challenge the geopolitical hegemony of the international community, that is the G7 and its sphere of influence across developed countries.”

Negrete-Gruson highlights the lack of solidity among the Brics nations is a key factor in it lacking investor appeal.

“There is limited economic cohesion among the new member countries, which further diminishes the enlarged group’s potential to impact investment interests,” she says. “Furthermore, the exclusionary nature of Brics hampers the economic progress of other smaller emerging market economies.”

This culminates in a view that has Brics challenging the geopolitical order as somewhat naïve. “Concerns around the group challenging dollar hegemony for now seem overblown,” Langham says.

“Given the competing geopolitical aims of members and a lack of willingness amongst members to cede control over foreign exchange rates and/or monetary policy.”

Looking at it from a perspective from within Brics, Fyodor Lukyanov, chairman of the Council on Foreign and Defense Policy, a Russian NGO, says the anti-western nature of Brics is overdone.

“Current and future Brics members have one thing in common: they reject the right of the United States and the European Union to impose restrictions on other countries’ foreign policy and economic activities,” he says.

Emerging voice

And although the grand aims of Brics seem overstated, there is a perspective where Brics could gradually expand its influence, by speaking for emerging markets.

“Brics, with its expanded membership, will seek to position itself as a voice for emerging economies and, as the G7’s share of the global economy continues to decline, then there will be a push from the newly emerging economic powerhouses to have more influence on the global stage,” Langham says.

For investors, this has big implications, Langham says. “It means re-thinking geopolitics to accommodate for evolving spheres of influence. Debt relief resolutions may become more complicated going forward, potentially curtailing IMF lending,” he says.

DeVito goes further, saying that increased co-operation and economic integration will make the bloc a more appealing investment proposition. “One only needs to look at the formation of the European Union, which started out as a loose steel and coal trading bloc in 1952,” he says.

DeVito adds that opening up trade and allowing cross-border capital flows will make markets more efficient as confidence grows and risks are re-appraised. “It may also lead to enhanced infrastructure investment and technology transfer from the wealthier Brics countries into the weaker ones.”

On this reading, DeVito adds: “The weaker countries may become more attractive as they obtain more guidance and investment from the stronger members, and this may well enhance the corporate investment opportunities available to external investors.”

Unfulfilled promise

But going forward, Brics offers less, not more, attraction to investors, Negrete-Gruson says. “Brics is often marketed as a resilient sample of a historically volatile asset class, drawing investments away from smaller, equally deserving nations,” she says.

“Most crucially, Brics has not fulfilled its promise of resilience. Recent global economic events have exposed the vulnerability of these nations, rendering Brics a less appealing investment destination.”

Therefore, she sees Brics as anathema from an investment perspective. “We don’t believe in the idea of Brics as an investment bloc. These are individual countries with their own economic and political priorities. Each country wants to attract foreign investment, but that is probably where any universal similarity ends.”

Negrete-Gruson therefore concludes: “It is simplistic and not constructive to lump these countries together for any particular purpose of analysis.”

Larose agrees, highlighting that the newly expanded Brics holds little interest to investors. “The recent expansion of the Brics alliance is nowhere near to become an important factor in investment decisions.”

Therefore, Brics, it could be said, is one serious example of how not to build an investment bloc.


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