As bets go, investing in BRICS not safe as houses

BARRING China, the other nations in the BRICS grouping have been hit as investors pull funds out.

SUDDENLY and somewhat surprisingly, the BRICS are starting to fall -- and the usual financial umbrellas won't prevent some serious resulting bumps on heads.

Since the global financial crisis, for the best reasons, investment has been pouring into the fast developing nations of the acronym coined by Goldman Sachs' Jim O'Neill: Brazil, Russia, India and China, with South Africa recently added to pluralise the concept.

In an interview this week, O'Neill said: "If I were to change it, I would just leave the 'C'. But, then, I don't think it would be much of an acronym."

In the first decade of this century, the BRICs -- leaving South Africa to one side -- grew at an annual average of 8.5 per cent.

During the current decade to 2020, O'Neill expects growth to moderate to 6.6 per cent, with most of the grunt coming from China, whose very size is crucial, he points out.

There are many reasons for the slowdown of the rest.

Brazil and Russia -- the latter essentially living off its gas these days, the Saudi of the Steppes -- are commodity reliant.

And as the latest forecast, published yesterday, from the Australian government's Export Finance and Insurance Corporation says: "Most commodity prices have continued to fall, and the consensus foresees further gradual decline into the medium term as new supply capacity starts up."

The tapering off of the US Federal Reserve's money-printing spree -- "quantitative easing" for the squeamish -- has hit many emerging markets hard.

The EFIC forecast stresses that "with its slowing growth and twin fiscal and external deficits, India has become one of the main targets of portfolio investors withdrawing capital from emerging markets" in anticipation of the taper.

Thus the rupee recently sank to its lowest level against the US dollar. The Indian economy slowed to 5 per cent for the year to March, the weakest growth in four years, inflation there remains stubbornly high, and the large current account deficit is financed by volatile portfolio flows.

The World Bank, rightly, has noted the dangers of developing countries enjoying growth spurts, then stagnating as a result of the notorious "middle-income trap".

They introduce some important, overdue structural reforms, start catching up after years or decades of languishing in the lower levels of the global economy, receive fan mail from market analysts and bankers, then start to believe in their own infallibility.

They take their eye off the ball, start to assume that the growth graph will continue regardless, postpone tackling big remaining reform challenges, and start to spend the money that they expect to keep rolling in, even before it has been booked.

O'Neill says India has been the biggest BRIC disappointment, with Brazil suffering the most from changeable investor perceptions. The decline in asset prices in Europe and the US has made them attractive again to global fund managers, especially as the US and, to a more modest extent, the European markets are showing signs of stabilising.

It's notable that the fallout from this shifting financial climate is not affecting East Asia seriously. That's in substantial part because the region learned its lessons well from the Asian financial crisis of 1997-98.

It has managed its economies cautiously and is also more profitably locked into the China story, which continues, albeit in an overdue, restructured shape.

Australians have never been exposed that much to the BRICS narrative, despite many efforts. None of them are easy to invest in directly and portfolio opportunities have been fairly limited.

But that doesn't mean the story's over. There are considerable opportunities awaiting in emerging markets. This is a temporary slide rather than an endgame.

Fund managers, while right to consider underpriced US and even European assets, should be judicious in how much of their portfolios they place there. For the old world will not grow at much of a lick, even if it is edging back into the black.

The emerging world remains a tremendous opportunity. It's just that, as ever, investors need to know where they're heading and why. It may be wise not to build that house with BRICS -- China excepted.

Southeast and North Asia remain rather better bets, even if assets there are more fully priced, and even if O'Neill hasn't yet workshopped a catchy acronym for those regions -- places we already know better, too.