Remember BRIC? Never get between the funds industry and a hot new theme. One of those acronyms that investment markets suddenly loved was BRIC, coined by Jim O’Neill of Goldman Sachs to neatly encapsulate the emerging economic powers that were Brazil, Russia, India and China.
The investment case was so clear-cut that investors lapped it up. Dissatisfaction with the stale narratives about Europe and the US, here were four massive growth opportunities powered by a market of 3 billion people. They were to become the world’s dominant suppliers of goods the rest of the world needed. What long-term investment success could be better than the rising wealth of half the world’s population?
As far back as October 2023 fund managers discovered analysts who knew Rio via Rajasthan and Chongqing through Chelyabinsk and who happily applied their mettle, often by schlep, to make introductions between unknown companies in unknown worlds, New Delhi, not New York. Funds kicked off and pitches sharpened, and of course, the indexes came out. MSCI created the first BRIC Index and the iShares MSCI BRIC ETF was launched in 2007.
And indeed, the 'R' in this incredible opportunity which represented approximately 7% of the Emerging Markets index at the close of 2021 was Russia. Now money managers are scrambling for the exit on Russia. BICs anyone?
Not if history is any indicator, as the chart below (via The Investment Ecosystem) illustrates, with back-tested data from early 2001. Following the 2007 ETF issuance, or 15 years, total return is dead flat, but relative returns have been an investor’s nightmare: total return equals 48% of the All Country World Index (ACWI) and only a dismal 17% of the US S&P 500.
Here are the Australian funds with the largest exposures to Russian assets.
BRICs failure teaches some lessons about some investment fads and trends that sound good at the time they're launched. BetaShares Crypto Innovators ETF (ASX:CRYP) has received more early-day publicity than any other Australian ETF in history. On its first day of listing (4/11/2021), it set new records: $40 million was traded, and its price peaked at $12.42 a few days later. As of this writing, CRYP is trading just above $5. Each time Firstlinks has panned cryptocurrencies as an investment, we get feedback saying we don't understand how the world has changed. Maybe that's true.
As for the 'C' in BRIC, Australians will be told daily between now and the election by our politicians about China, about the threat to national and Pacific security. Where export markets used to be dominated by the UK, and then later the US and then Japan, China now accounts for the single greatest share of Australian exports supporting many corporate profits and the Federal budget as shown below in Ashley Owen’s chart. Russian trade is insignificant and our AUKUS allies the UK down to 1 % ;USA at 4 %
At last it seems Europe is awakening to the fact that its dependence on Russia for energy supplies has been a major strategic failure, as this eye-popping map lays bare the Russia network of natural gas pipelines and share of supply from Russia (and much of it from Ukraine).
Watching this market play out might seem like a long game with long-term gains, but one of the lessons of Business 101 is not to get too much of your appetite from any one customer or supplier. One day, you may come to dislike their politics, their ethics, their human rights or the people you deal with. Or they may not like you. There are similarities between European reliance on Russia and Australia’s on China, and both dependants should have diversified long before they reached this point.
Ashley Owen is taking a look at a record of military conflicts and their impact on stock markets
...and what this means for the potential fallout from the latest Russian invasion this week. It’s a humanitarian crisis but what is the longer term implication for markets?
We have fundamental stories such as this one
...explaining Cboe's (formerly known as Chi-X's) plans to expand against ASX, as told by Vic Jokovic. Those who look more narrowly than the ASX as the only provider of share trading, clearing and derivatives will welcome well-resourced competition.
Meg Heffron, specialist SMSF practitioner
...will identify some techniques for managing your SMSF in a new monthly column to help SMSF trustees. She begins with preparing an SMSF for a possible incapacity of a trustee.
On the back of the recent new superannuation rules
...being passed through Parliament, Greg Combet and Julie Steed explain how on 1 July 2022, many will find it easier to make contributions and what opportunities new rules provide.
Completing a female trifecta this International Women's Day
...what with the preponderance of articles (despite our best efforts) sent to us written by males, Lisa de Franck demonstrates that sustainable investing is not a fashion either fund manager driven or fashionable, but a bona fide grass roots movement.
Gino Rossi then points that the concentration risk
...in the Australian share market has some similarities with US, and one cannot take it for granted that US mega cap stocks are too big to fail. They’re too small for most fund managers to analyse.
EFT price is very close to the Net Asset Value
...but Rodney Lay discusses occasions when the spread can exceed what appears to be your overall profitability prospects. For example trading Australian equity ETFs before all local stocks opened.
Revolution Asset Management
...an affiliate of Channel Capital, this week publishes a White Paper discussing the global inflationary pressures building, including demand and supply dislocations.
