Brazil, Russia, India and China: The BRIC is broken - Firstlinks newsletter

Remember BRIC? Never stand between the funds industry and an exciting new theme. BRIC was one of those acronyms that investment markets suddenly loved after Jim O'Neill of Goldman Sachs coined it to neatly sum up the emerging economic powers of Brazil, Russia, India and China.

The investment case was so obvious that investors lapped it up. Tired of the old stories about Europe and the US, here were four massive growth opportunities driven by a market of 3 billion people. They were supposed to become the dominant suppliers of goods the rest of the world needed. How could the rising wealth of half the world's population not be a long-term investment success?

Fund managers found analysts who knew Rio from Rajasthan and Chongqing from Chelyabinsk, who happily schlepped to meet unknown companies in new frontiers, New Delhi not New York. Funds were launched and presentations polished, and of course, out came the indexes. MSCI created the first BRIC Index, and the iShares MSCI BRIC ETF was launched in 2007.

And yes, the 'R' in this amazing opportunity which comprised about 7% of the Emerging Markets index at the end of 2021 was Russia. Now fund managers are rushing for the Russia exit. BICs anyone?

Not if the past is a guide, as the chart below (from The Investment Ecosystem) shows, with back-tested data from the beginning of 2001. Since the 2007 ETF launch, or 15 years, the total return has gone nowhere, but relative returns have been an investor nightmare: the total return is 48% of the All Country World Index (ACWI) and a miserable 17% of the US S&P500. 

Morningstar analyst, Ben Johnson, wrote this week:

"Global index providers MSCI and FTSE Russell announced on March 2 they would delete Russian stocks from their mainline benchmarks, writing their prices down to zero in the process. They said the country’s securities are no longer investable. The Moscow Exchange is closed, and London and New York exchanges have halted trading of listed depositary receipts of Russian firms. If index providers’ clients can’t trade the stocks, they don’t want them in the index.

As I see it, the message is as strong as an index manufacturer can send from its perch, effectively: “You’re on your own now, and your stock market is worthless." ... (In the US) Morningstar data shows there were 150 index-tracking ETFs and mutual funds with more than 0.5% of their portfolio invested in Russian equities at the end of last year. The combined value of these funds’ Russian stock holdings totalled nearly $17.5 billion, representing 1.9% of their total assets. As of the end of February 2022, the value of these funds’ positions in Russian stocks had fallen more than 77%, to just below $4 billion, representing 0.5% of their assets. In the coming days, it is likely that these funds’ sponsors will write the value of many of these stocks down to zero.”

Australian funds with biggest exposures to Russian assets are listed here.

The relative failure of BRICs is a lesson about some investment fads and trends which look good when they are launched. There has never been more initial publicity for an Australian ETF than for BetaShares Crypto Innovators ETF (ASX:CRYP). On its first day of listing on 4 November 2021, it smashed previous records with $40 million traded and its price peaked at $12.42 a few days later. At time of writing, CRYP trades a little over $5. Each time Firstlinks criticises cryptocurrencies as an investment, we receive feedback that we don't realise how the world has changed. Maybe that's true.

Meanwhile, on the 'C' in BRIC, Australians will hear daily warnings from our politicians between now and the election about China and the threat to national and Pacific security. Where once the UK, the US and then Japan dominated Australia's export markets, China buys by far the greatest share of exports now, underpinning many corporate profits and the Federal budget, as shown below in Ashley Owen's chart. Russian trade is not significant, while our AUKUS allies the UK is down to 1% and USA is at 4%.

Europe now realises it has made a major strategic mistake with its dependence on Russia for its energy supplies, as this startling map shows the natural gas pipelines and share of supply from Russia and much of it from Ukraine.

Source: Bloomberg

One of the lessons they teach in Business 101 is not to become too dependent on any one customer or supplier. Some day, you might not like their politics, their ethics, their human rights or the people you deal with. Or they may not like you. There are parallels between Europe's dependence on Russia and Australia's on China, and both dependants should have diversified well before reaching this point.

This week, Ashley Owen looks at the history of military conflicts and the impact on stockmarkets, and the likely outcomes of Russia's latest invasion. It's a humanitarian crisis but what are the longer term consequences for markets?

Our interview with Vic Jokovic sheds light on the expansion plans of ASX's competitor, Cboe (formerly Chi-X). Investors who think the ASX has a monopoly on share trading, clearing and derivatives should welcome a well-resourced competitor.

In a new monthly column to assist SMSF trustees, specialist Meg Heffron will explore techniques for managing your SMSF. She starts with how to prepare an SMSF for a potential incapacity of a trustee.

The recent passing of new superannuation rules will make contributions easier for many, and Julie Steed shows the opportunities coming from 1 July 2022.

And completing a trifecta of female authors to celebrate International Women's Day (because despite our best efforts, the vast majority of articles sent to us are written by men), Lisa de Franck shows that sustainable investing is not a trendy fad driven by fund managers, but due to genuine grass roots demand.

Then Gino Rossi shows that the concentration risk in the Australian stock market has some parallels in the US, and investors should not assume the US mega cap stocks are too big to fail. There's a fertile ground in global micro companies that fewer fund managers analyse.

Most investors who buy or sell ETFs assume the price is extremely close to the Net Asset Value, but Rodney Lay explains there are times when the spread can be wide and expensive. Watch, for example, trading Australian equity ETFs before all local stocks have opened.

This week's White Paper from Revolution Asset Management (an affiliate of Channel Capital) looks at rising global inflationary pressures including demand and supply dislocations.

Finally, at this incredibly difficult time for Ukraine, I mention Sting's new recording of 'Russians' which he originally released on his debut solo album in 1985, or 37 years ago. It's as poignant today as when it was written during the Cold War, and he says:

"I’ve only rarely sung this song in the many years since it was written, because I never thought it would be relevant again. But, in the light of one man’s bloody and woefully misguided decision to invade a peaceful, unthreatening neighbour, the song is, once again, a plea for our common humanity. For the brave Ukrainians fighting against this brutal tyranny and also the many Russians who are protesting this outrage despite the threat of arrest and imprisonment. We, all of us, love our children. Stop the war."