Emerging Market Potential – A Case of East versus West

By Simon Bartram

BRIC countries seperate

The term BRIC was first imprinted on the investor’s psychological map of the world in 2001 through an economic thesis by Jim O’Neill. It refers to the largest emerging economies (Brazil, Russia, India and China) which were responsible for most of the global economic growth seen from the early 2000s until the financial crisis. More than a decade later, there have been immense developments in the pace of change in each of these economies, and so it’s time for a quick reassessment of our loose conceptual categories. All graphical data is taken from the International Monetary Fund unless otherwise stated.

Graph 1

We should begin with a general glance at the GDP growth rates of the BRIC economies compared to those of the ‘developed’ world. The central point to notice is that BRIC economies no longer share as much in common as they once had. As the graph above shows, whilst it made sense to group the BRIC economies as fast-growing emerging economies between 2000 and 2010, Russia and Brazil can no longer boast significantly higher growth rates than developed G7 nations. There is a clear split between India and China, racing towards developed-nation status, and Brazil and Russia which are no longer converging towards G7-levels of GDP per capita.

Graph 2

The second point to make is that these are regional trends. Brazil is performing similarly to other Latin American economies, whilst the Asean-5 (Indonesia, Malaysia, the Philippines, Singapore and Thailand) are performing similarly to China, unsurprisingly benefitting from mutual trade, mutual growth and mutual decline. While all of the Big Four BRIC economies have seen reduced rates of GDP growth, there does appear to be a marked distinction between the western and eastern BRIC economies.

There are a host of reasons that could potentially explain this split. Up until 1820, India and China had the two largest economies – a unique historical trait not shared by Brazil and Russia. There has also been an explosion in the number of Chinese students studying at American and UK universities. A parliamentary briefing paper by UniversitiesUK (link: http://www.universitiesuk.ac.uk/highereducation/Documents/2013/UKandChina.pdf) reveals that 26 per cent of non-EU students at UK universities were from China in 2011/2012. Chinese students make up the largest number of international students. The number of students from China increased by 19 per cent, (and from Malaysia by eight per cent, Singapore 15 per cent; Thailand six per cent; and Hong Kong 15 per cent), whilst numbers from the rest of the world went down by three per cent. It is this talent which will help to sustain Asian growth. Indeed, economies such as those in South Korea and Singapore have caught up and even surpassed those of many European economies.

By contrast, Russia and Brazil face distinct problems. Russian growth is heavily dependent upon commodity prices – mainly oil – which is not a sustainable recipe for economic growth. Brazil is recovering from the 2013 protests and suffers from complacent political leadership without any radical economic vision.

Clearly, then, the term BRIC economies is a hugely unhelpful analytical tool in economic discourse. It groups together economies that are quite different, encountering different economic tides in different geographical settings facing different social and political circumstances. However, there is a wider point to make. Even if Brazil, Russia, India and China could be grouped as large, highly-populated, determinably high-growth emerging market economies, would an investor be any better informed about their investment decisions? The following graph suggests otherwise:

Graph 3

This graph was included in a study by J R Ritter in 2004, three years after the term BRIC entered economic discourse. The graph shows that there is no clear correlation between real GDP per capita growth and real equity returns. Indeed, there may even appear to be a slight negative correlation. The reasons behind this are complex, debatable and, most importantly, beyond the scope of this article. However, two concluding points ought to be stated. Firstly, it is clear that, in terms of economic growth, there appears to be two different trends in the East and in the West, which simply is not captured by an all-encompassing notion of a BRIC bloc of emerging economies. Secondly, marketing investment decisions based upon these trends alone would be remarkably lazy and foolish.

Simon Bartram is a freelance writer, having graduated with a first-class degree in Modern History and Philosophy from the University of St Andrews. He works full-time in the City of London and is a student of the Institute of Chartered Accountants in England and Wales. You can follow him on Twitter @Simon_M_Bartram

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