Falling Like a BRIC

BRIC, a geo-economic acronym coined in 2001 by Jim O’Neill of Goldman Sachs, was apparently introduced to forecast a convergence among fast-growing emerging economies, forecasting that by 2030, the BRIC nations will have a combined economy larger than those of the G-7.

Well, 2030 is still a long way off, but if stock-markets are a leading indicator of economic growth, the past 5 years has put a dent in this prediction.

The upper part of the following chart shows the performance of the FTSE BRIC Index, which represents the 50 largest companies by market cap from Brazil, Russia, India and China, weekly data points since January 2006. The blue line is a 40-week, or 200 day, moving average, often used as guidance to support and/or price resistance. Kindly note that the moving average has been a barrier to price since early 2011.
weekly_blog_130515_01

 
The lower part of the chart shows the BRIC index relative to the MS World Index, a free-float weighted stock index of developed world markets, i.e. it doesn’t include emerging markets.

As can be seen, the BRIC index has been underperforming the world index since as far back as late 2009, with this underperformance accelerating since 2011, see the red dashed line. Why is this?

Well, surely it cannot be down to worse economic growth within the BRIC economies, as post the 2007 financial crisis, 40 percent of all growth in the global economy has occurred in China, albeit that China’s rate of economic growth has slowed from 12% pa in 2007 to 7.7% now, versus the 3% pa projected for the global economy by the IMF.

But there lies the rub, China is the stand-out within the BRIC compilation, in respect of economic growth, as GDP for the other three has collapsed, as in Russia annualised 9.3% to 2.1%; India 11% to 4.5% and Brazil from 9.63% to just 1.4% now. Adding South Africa to the mix in 2010, expanding the acronym to BRICS, hasn’t helped on this front either, as it’s GDP has fallen from 7% in 2007 to 2.5% as at year end 2012.

weekly_blog_130515_02

So China has a distorting effect on how the BRIC index performs, but so does the fortunes of commodities, as all of the BRIC (and now BRICS) constituents are large commodity players, especially in agriculture.

As such, it’s of interest to overlay the BRIC index relative to a commodity index, shown in blue, where we can observe a close correlation to the “relative to global stocksuntil recently that is.

Is this suggesting that the BRICS are about to benefit from rising commodity prices OR that BRICS, Global GDP and the price of commodities in general are all signalling a major change in trend.

We will leave you to ponder on this.

 

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2 responses to this post.

  1. […] commentary of mid-May of this year, entitled “Falling Like a BRIC,” highlighted the under-performance of this asset class, relative to World stocks in general, […]

    Reply

  2. […] commentary of mid-May 2013, entitled “Falling Like a BRIC,” highlighted the correlation between commodities and the emerging markets asset class, including […]

    Reply

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