The proposed expansion of the BRICS alliance, comprising Brazil, Russia, India, China, and South Africa, with the inclusion of Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates, has failed to capture the attention of wealth advisors and RIAs. While this expansion increases the collective global GDP share of BRICS from 26% to around 29%, investment professionals perceive it more as a geopolitical maneuver than a promising investment opportunity.
Key takeaways from the BRICS expansion:
- BRICS Expansion: Limited Investment Appeal, Say Wealth Advisors and RIAs.
- The proposed BRICS expansion includes six new emerging markets.
- Goal: Create a balance of power between Western Europe and emerging nations.
- With new members, the global GDP share increases to around 29%.
- Challenges include sanctions, debt ratings, hyperinflation, and fiscal issues.
- The possibility of reducing dependence on the U.S. dollar is mentioned.
- Consensus: BRICS expansion unlikely to disrupt U.S. dollar dominance.
Thierry Larose, a portfolio manager/analyst at Vontobel Asset Management overseeing $117 billion in assets, believes the primary motivation behind this expansion is geopolitical, aimed at creating a balance of power against Western Europe. Damien Buchet, CIO at Finisterre Capital with $3.6 billion in assets under management, shares this view and sees the expansion as a non-event for investors. Many of the newly invited countries face significant challenges, making them unattractive for investment. Iran faces sanctions, Ethiopia has a CCC debt rating, Argentina grapples with hyperinflation and upcoming elections, and Egypt has fiscal and balance of payments issues.
Buchet emphasizes that, except for Saudi Arabia, the UAE, and possibly Egypt, the other expanded BRICS nations are either sanctioned, too small, or in severe distress, rendering them unlikely to revive investor interest. This assessment extends to equities, as most of these countries lack functioning and accessible stock markets.
Other industry experts echo these concerns, emphasizing the difficulties of investing in some of the new BRICS members. Fiona Manning, a fund manager at Premier Miton Investors with £10.5 billion ($13.1 billion) in assets, believes the BRICS' political expansion won't reignite interest in emerging market equities due to sustainability, practical, and sanctions concerns.
Moreover, many wealth advisors and RIAs question the idea of BRICS as an exclusionary group, contradicting the diversification principles of emerging market investments. Maria Negrete-Gruson, managing director at Artisan Partners' sustainable emerging markets team overseeing $142.8 billion in assets, argues that isolating a select few nations within the emerging markets category goes against the essence of diversification, ultimately harming investors and the broader economic development of emerging markets.
Manning concurs, suggesting that active investors should explore a wider range of opportunities for attractive risk-adjusted returns instead of artificially narrowing their investment universe.
Critics also question the BRICS' emphasis on size as a key performance factor. Negrete-Gruson points out that larger economies like Russia and China may carry geopolitical risks that smaller non-BRICS nations do not. China, accounting for approximately 18% of world GDP in 2022, may face challenges related to its economic growth.
However, some experts see potential positives in the expanded BRICS bloc. Marcelo Assalin, head of emerging markets debt at William Blair Investment Management with $62 billion in assets, anticipates India becoming a significant economic power. He envisions India playing a central role in creating a corridor connecting the Middle East, India, and Europe, offering an alternative to China's Belt and Road initiative.
Assalin also foresees improved funding availability for emerging market countries within the expanded BRICS, potentially resulting in more accessible and affordable financing options for nations struggling to secure funding.
While some mention the possibility of reducing dependence on the U.S. dollar as an outcome of the BRICS expansion, they dismiss the idea of it replacing the U.S. dollar as the world's reserve currency shortly. Commodities like oil predominantly trade and quote in U.S. dollars, making it challenging for other currencies to compete as reserve currencies. While the use of the renminbi is increasing, it remains far from claiming leadership as the world's reserve currency.
In summary, the BRICS expansion has failed to excite wealth advisors and RIAs, who view it primarily as a geopolitical move rather than a compelling investment opportunity. Challenges faced by many new BRICS members, coupled with doubts about the concept itself, have led experts to question its impact on emerging market investment strategies. Despite differing opinions, the consensus is that the BRICS expansion is unlikely to disrupt the current global economic order dominated by the U.S. dollar.
Source: Pensions&Investments
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