29-01-2016, 05:08 #1
[EN] The Brics are dead. Long live the Ticks
Tech-heavy Taiwan, India, China and Korea are the new darlings of the EM world
January 28, 2016
The Brics concept, based on the belief that the quartet of Brazil, Russia, India and China would power an unstoppable wave of emerging markets-led economic growth, gripped the firmament for more than a decade after it was conjured into existence by Jim O’Neill, then chief economist at Goldman Sachs, in 2001.
But the deepening recessions in Brazil and Russia have now dealt such a blow to faith in the Bric hypothesis that, late last year, even Goldman closed its Bric fund after assets dwindled to $100m, from a peak of more than $800m at the end of 2010.
In its place, emerging market fund managers appear to have stumbled on its potential replacement — the Ticks, with tech-heavy Taiwan and (South) Korea elbowing aside commodity-centric Brazil and Russia.
Aside from a catchy acronym, the realignment tells us much about the changing nature of emerging markets — and the world in general — with services, particularly technology, to the fore and trade in physical goods, especially commodities, in retreat.
“Bric is not the engine of emerging market growth it was. There is a new order of things,” says Steven Holden, founder of Copley Fund Research, which tracks 120 EM equity funds with combined assets of $230bn.
“Tech is just rampant and the consumer is what you are investing in EMs now. I don’t think many people are aware of the new EM story as much as they should be. They think of Brazil, Russia, materials, big energy companies. That has changed hugely.”
Richard Sneller, head of emerging market equities at Baillie Gifford, whose EM Growth and EM Leading Companies funds invest 45-50 per cent of their $10bn-$15bn of assets in technology companies, adds: “In many emerging markets the speed with which young consumers are adapting to technological change, in areas such as ecommerce and online shopping, is much faster than in the US.
“Trends that we hoped would emerge 15-20 years ago have come to generate significant cash flows.”
Luke Richdale, chief client portfolio manager, emerging markets at JPMorgan Asset Management, which manages $70bn in EM and Asia-Pacific equities, says: “We are seeing leapfrogging [of technology] going on in China. There are models in the west, bricks and mortar etc, that simply won’t happen there.”
According to Copley’s data, the average emerging market equity fund now has a near-54 per cent weighting to the Ticks, up from 40 per cent in April 2013, while the weighting to Brics has remained in the low 40s, despite a sharp rise in China’s index weighting, as the first chart shows.
As of December, 63 per cent of funds had at least 50 per cent of their assets invested in the Ticks, while only 10 per cent had such high exposure to the Brics.
Houses such as JPMorgan, Nordea and Swedbank have a weighting of at least 35 per cent to Taiwan and Korea alone in at least some of their funds, while vehicles managed by Carmignac, Fidelity and Baillie Gifford have exposure of 3 per cent or less to Brazil and Russia.
The average EM equity fund now has as much exposure to China’s IT industry as it does to the country’s financial sector, as the second chart shows — despite the index weighting of financials being 4 percentage points higher — following a sharp rise in tech holdings in the past three years.
The trend was turbocharged late last year when MSCI widened its EM index to include companies listed overseas, adding the likes of New York-listed Alibaba, Baidu and Netease to the index alongside existing heavyweights such as Tencent.
Wider afield, the two stocks most commonly owned by the 120 funds monitored by Copley are Taiwanese chipmaker TSMC and Korea’s Samsung Electronics.
“These are global companies that are either leaders or significantly well positioned in oligopolistic industries,” says Mr Sneller, who also holds Taiwan’s Hon Hai Precision Industry (also known as Foxconn), partly in the hope that Apple, its largest customer, will start to source automobile parts from it if the US tech group makes a strong push into vehicles.
To some extent, funds’ buying of Ticks and tech stocks reflects their rising weightings in the MSCI index, particularly with many basic materials and energy companies suffering sharp falls in market capitalisation amid the commodity rout. The four Ticks now have a combined weighting of 62.4 per cent.
But Mr Holden says many managers have been making active choices. “Managers are definitely ramping up their technology exposure. The numbers buying and overweight [the index] have gone up. For some funds, the index means nothing.”
Almost a third of funds are now overweight Taiwan, up from just 8 per cent in September 2013, Mr Holden says.
One unanswered question is whether this trend reflects an underlying structural change or whether it is purely cyclical, with sectors such as IT and consumer stocks naturally seeing their weightings rise as commodity-related companies go backwards.
Taiwan was the largest country weighting in the MSCI EM index during the dotcom boom of the early 2000s, before the start of the commodity supercycle. Brazil, which led that phenomenon, has subsequently seen its weighting fall from a peak of 17.6 per cent in June 2008 to just 5.2 per cent.
JPMAM’s Mr Richdale believes it is a bit of both. “There is an underlying structural story but at the same time equity markets in emerging markets are quite cyclical in nature,” he says.
Mr Sneller accepts there is a cyclical element, with some of the consumer-oriented “toothpaste and tractors” stocks he also likes having previously been in vogue in the 1990s, before the Asian financial crises.
However, he believes structural factors are also at play with, for instance, online shopping likely to become far more dominant in China than, say, the US.
“The established incumbent legacy [shop] network is not there [in China],” he says. “You go to a third tier city in China and you don’t have swanky malls.
“[Chinese people] value their time extremely highly. Why would you want to waste your time walking around second-grade shopping malls when you can do it online in a fraction of the time?”
Analysis by Michael Power, strategist at Investec Asset Management, suggests the trend may be cyclical. All the Ticks (barring India which has a small current account deficit) are in the same quadrant of a matrix he uses to distinguish emerging market countries — that comprising manufactured goods exporters with an external account surplus.
As the fortunes of these quadrants tend to ebb and flow in line with global liquidity and commodity demand, they tend to perform in a cynical manner.
Yet even here there could be a structural factor. Mr Power says the quadrant inhabited by most of the Ticks “always does best”, in risk-adjusted terms, over an economic cycle, suggesting it should increase its weight over time.
Whatever the truth of that, the rotation of the MSCI index away from primary industries and towards technology does raise a question as to why emerging market equities are still so driven by sentiment towards commodities.
29-01-2016, 05:17 #2
The story of the Brics
January 15, 2010
On the desk of Jim O’Neill, chief economist for Goldman Sachs, stand four flimsy flags. They look out of place among the expensive computer terminals of the investment bank’s plush London office, like leftovers of a child’s geography homework or cheap mementos from backpacking trips to exotic parts of the world. But these flags hint at a more interesting story – of the latest way in which money and ideas are reshaping the world. The small scraps of fabric are pennants for big countries: Brazil, Russia, India and China. And almost a decade ago, O’Neill decided to start thinking of them as a group – which he gave the acronym Bric.
It was a simple mental prop. The bolder move was to predict – publicly, and in Goldman’s name – that by 2041 (later revised to 2039, then 2032) the Brics would overtake the six largest western economies in terms of economic might. The four flags would come to represent the pillars of the 21st-century economy.
At the time, many scoffed at this idea. The predictions turned conventional western wisdom on its head; and O’Neill hardly seemed an obvious champion of the concept. A large man with working-class Manchester roots, he does not exude the aura of any globetrotting elite. His office is decorated with splashes of cherry red memorabilia from Manchester United Football Club, and he still speaks with the thick, flattened vowels of his childhood. Indeed, when O’Neill coined the term Bric in 2001, he had never properly visited three of the four countries (the exception was China), and spoke none of their languages. Yet, notwithstanding those unlikely beginnings, in the past decade, Bric has become a near ubiquitous financial term, shaping how a generation of investors, financiers and policymakers view the emerging markets: companies ranging from Nissan to media group WPP have developed Brics business strategies; several dozen financial institutions now run Brics funds; business schools have launched Brics courses; and this April Phillips de Pury will be holding a Brics-themed auction. “The Brics concept … that O’Neill created … has become such a strong brand,” says Felipe Góes, adviser to the mayor of Rio de Janeiro, who is organising the first Brics think-tank.
O’Neill speaks in smaller spheres for a moment: “It has transformed my life,” he says.
To some critics, the fuss about Brics is overblown. The term is hype, spin, from a bank and banking industry accustomed to disguising such guff as genuinely new ideas and concepts – the better to profit from them. “Brics is really just marketing – it’s nonsense!” says Charles Dumas, a London-based economist who disputes many elements of the Brics concept, such as the idea that these countries will keep growing inexorably into the future. Others are more cynical still, arguing that Goldmans Sachs has used the concept to extend its global power, and thus turbo-charge its formidable profit-making machine. O’Neill denies this latter accusation. “I really believe in this idea of Brics, that this idea can make the world a better place – it’s what drives me,” he says.
But even if Brics is self-interested spin, such spin – an idea in itself, really – can sometimes take on a life of its own, beyond what its creators expect or even hope for. By creating the word Brics, O’Neill has redrawn powerbrokers’ cognitive map, helping them to articulate a fundamental shift of influence away from the western world. And if you believe that the way humans think and speak not only reflects reality, but can shape its future path too, then this Brics tag has itself come both to reflect and drive the change – albeit from some unlikely beginnings.
29-01-2016, 05:20 #3
The rise of the non-western world
The way O’Neill, 52, tells the tale of how he developed the Brics – and he is a born raconteur – starts, a touch melodramatically, on the day terrorists flew aircraft into the World Trade Centre and Pentagon, killing thousands of people.
The son of a postman, O’Neill grew up in south Manchester, where he studied at the local comprehensive (Oasis’s Noel and Liam Gallagher were pupils there too, albeit later) and spent much of his time playing football. After school, he decided to study at Sheffield University, partly because it offered easy access to watch Manchester United. (Today, he has a season tickets at Old Trafford, and leaves spare tickets behind the bar at a local pub, for childhood friends to use.) During his time there, between “getting drunk and playing football”, O’Neill discovered a passion for economics. And after completing a doctorate in the subject, he worked as a foreign exchange analyst at a series of City banks, eventually joining Goldman in 1995 as co-head of economics. In the summer of 2001, Gavyn Davies, O’Neill’s highly respected co-chief, announced his departure – leaving O’Neill the sole leader, and under huge pressure to perform. “I thought: “Oh my god, I have got to put my imprint on this department,” he recalls. “I was searching for a theme and a new idea.”
Inspiration came – a bittersweet gift. On September 11, as the first aircraft approached the Twin Towers, where he had delivered a lecture a few days earlier, O’Neill was hosting a global video conference call. Halfway through, the New York faces vanished from the screen. O’Neill later learnt the staff had been safely evacuated from their offices, but he still reeled in shock at the events. In the days that followed, his mind began to whir. As a foreign exchange analyst, O’Neill had always been a passionate advocate of globalisation, and was fascinated by the rising power of Asia. And to him, the horror in Manhattan was a powerful demonstration of exactly why the non-western world was starting to matter more and more – albeit in a negative way. However, O’Neill also believed – or hoped – that this shift in power could be seen in a more positive sense, too. “What 9/11 told me was that there was no way that globalisation was going to be Americanisation in the future – nor should it be,” he says. “In order for globalisation to advance, it had to be accepted by more people … but not by imposing the dominant American social and philosophical beliefs and structures.”
In practical terms, O’Neill decided, that meant economists had to look more closely at how non-western economies could wield more power in the future. As he scoured the globe, he became increasingly fascinated by four countries: Brazil, India, Russia and China. In one sense, the four seemed disparate, separated geographically and culturally; they had never acted as a bloc in any way, never conceived of themselves as a unit. Yet what they all shared in 2001 were large populations, underdeveloped economies and governments that appeared willing to embrace global markets and some elements of globalisation. To O’Neill, these characteristics made them natural sisters: they all had the potential for rapid future growth.
Excited, he tried to work out how to label this bunch. Since China was easily the largest, it made sense to put its name first. “Lloyd Blankfein [Goldman Sachs’s chief executive] always teases me about it – he says I should have called the group the Cribs,” O’Neill recalls. But O’Neill thought that a word linked to babies would seem patronising. So on November 30 2001, he launched his Big Idea: Goldman Sachs’s Global Economic Paper #66, “Building Better Global Economic Brics”. He predicted, soberly, that “over the next 10 years, the weight of the Brics and especially China in world GDP will grow” – and warned, perhaps a little less soberly, that “in line with these prospects, world policymaking forums should be reorganised” to give more power to the group he had now dubbed Brics.
29-01-2016, 05:21 #4
Welcome to Briclife
The paper immediately sparked interest among Goldman Sachs’s corporate clients, particularly those already selling – or trying to sell – consumer products to the emerging markets. “I found the Bric thing fascinating right from the start,” says Martin Sorrell, chief executive of WPP. “It tapped into what we had been already discussing.” But to many investors and bankers – including some inside Goldman Sachs – it all seemed rather fanciful, particularly given that countries such as Brazil had recently experienced hyperinflation. “When I first spoke at a big group in Rio [after the paper was published], it was to around 1,000 investors from all of Latin America,” recalls O’Neill. “The guy who was introducing me whispered in my ear as he went to the podium, ‘we all know that the only reason the B is there is because without it there is no acronym.’”
But O’Neill kept discussing the concept with colleagues and in 2003 his team produced the next offering: a paper called “Dreaming with Brics: The Path to 2050”. It boldly declared that by 2039 the Brics group could overtake the largest western economies in scale. “The list of the world’s 10 largest economies may look quite different in 2050,” it said. That prediction launched O’Neill’s team into what he calls Briclife. Within days, Goldman economists were flooded with e-mails from executives at companies ranging from mobile telecoms group Vodafone to miner BHP Billiton to Ikea and Nissan. By luck – or insight – O’Neill had produced this tag just as many western businesses were trying to hone their strategies to sell products to the non-western world, or to use regions such as China as a manufacturing base. And in a world where corporate boards face information overload, Brics suddenly provided executives with a snappy way of discussing strategy. Better still, unlike phrases such as “emerging markets” or “developing world”, Brics did not sound patronising, or unpromising; it was neutral, strong, politically correct.
Soon rivals, such as HSBC and Deutsche Bank fund unit DWS, were launching dedicated investment funds marketed under the label of Brics. “We asked our lawyers if we could trademark the word Brics, but they said not – apparently it’s not a product,” O’Neill recalls. Steadily, the brand spread, taking on a life beyond Goldman. Initially, most hedge funds ignored the concept as marketing hype. But as investors began to purchase assets specifically linked to the rise of Brics, the hedge-funders recognised that the way that China, say, was making cars could affect demand for Brazilian copper. New correlations were developing in asset prices, amid strong investment flows (since 2003, the Brics stock markets have risen from 2 to 9 per cent of global market capitalisation, and O’Neill forecasts they will represent almost 50 per cent of global market capitalisation in 2050).
Who’s in, who’s out?
Unsurprisingly, O’Neill’s rivals started to snipe. Some economists said it was ridiculous to make forecasts as far out as 2050, particularly since many of O’Neill’s projections seemed to involve extrapolating current growth on a straight line. Others took issue with the idea that the four Bric countries could – or should – be described as a group. “Economically, financially and politically, China overshadows and will continue to overshadow the other Brics,” analysts at Deutsche Bank argued. Some banks tried to ban their employees from using the B word. “Why the hell should we do Goldman’s marketing for it?” says the chief executive of one of the world’s biggest investment banks. Meanwhile, out in the market, some investors suggested it would be better to talk about Bricks (with Korea included), or Brimck (with Mexico as well) or even Abrimcks (chucking in the Arab region and South Africa). One market wag joked that somebody should start trading the Cement bloc (Countries Excluded from the Emerging New Terminology).
O’Neill fought back. The Goldman team started to crank out Bric research, looking at everything from the future size of the Indian middle class to car use in Brazil. In an effort to soothe some ruffled feathers, in 2005 O’Neill tried to explain why Korea and Mexico had not been included in his big idea (the rather arbitrary-sounding reason was that they were members of the Organisation for Economic Co-operation and Development). He also tried to placate some of the non-Brics by offering a new term: the “N-11”, or Next Eleven nations on the list to emerge as powers. This was a confusingly broad club, encompassing Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey and Vietnam, but within months companies such as Nissan and WPP were bandying “N-11” around their boardrooms. Another marketing tag – or boundary on a cognitive map – had been born.
Nor was it just the corporate world getting excited. O’Neill heard that politicians in Nigeria were slapping the term on their internal propaganda campaigns, redefining some of the slogans for their own ends; it was uncannily reminiscent of how 19th-century Nigerians once transposed the language of the Anglican Church to their own cultural traditions.
The Teflon term
Perhaps the most remarkable aspect of O’Neill’s golden child is what it didn’t do: collapse under scrutiny as the credit crisis hit. Over the past two years, many of Wall Street’s big ideas have been exposed as woefully ill-conceived at best, utterly fallacious at worst. However, during the great re-reckoning, the Brics concept has flourished. Most of the Brics and N-11 emerged from the crisis well, relative to the economies of the western world. Their banking systems are intact, and their economies are growing at breakneck speed. “As a result,” wrote O’Neill in a recent paper, “we think our long-term 2050 Bric ‘dream’ projections are more, rather than less, likely to materialise.” More specifically, Goldman now predicts that China’s economy will become as big as the US’s by 2027, while the total Brics group will eclipse the big western economies by 2032 – almost a decade sooner than first thought.
That, O’Neill argues, will overturn many western assumptions about how the world works. These days, Goldman aggressively recommends that investors decide which western companies to invest in based on whether they are selling to the Brics and N-11, rather than just western consumers. (In another piece of neat cultural transposition, Goldman recently dubbed this strategy “investment in the Brics Nifty 50” [companies which sell to the Brics region] – a reference to the “nifty 50” of big western companies that were beloved by investors back in the 1970s, when it was presumed that the US and Europe would provide the engines of growth.) “We estimate that two billion people could join the global middle-class by 2030, mainly from Brics,” Goldman’s latest research note trills.
The argument is beloved by some investors. “Had you heeded O’Neill’s work and gotten invested in the stock markets of those four nations [back in 2001], you’d have made more money this past decade than by doing virtually anything else conceivable,” declared Joshua Brown, an influential investment commentator, on his Wall Street blog last month. (O’Neill brushes off the praise as “somewhat embarrassing”.) Others fear it is the next big bubble. To some, the exclusion of countries such as South Africa – or even Indonesia – looks increasingly odd. And the inclusion of Russia is presenting an ever-greater headache, given that the Russian economy was the one Bric to take a real fall in the credit crisis – so severe, in fact, that some investors (and even a few bankers inside Goldman) suspect it is now time to kick Russia out of the group.
Unsurprisingly, O’Neill is reluctant to undermine Goldman’s relations with Moscow by doing that. Although he admits that Russia has “disappointed”, he also insists that if the country “recovers strongly and quickly in 2010 and 2011, as we expect, we believe it will deserve its Bric status”.
29-01-2016, 05:22 #5
Back to reality
In the early years of Bric-dom, the four countries chosen by O’Neill had reactions ranging from bafflement to indifference. But soon the countries began to embrace the designation, and use it to get their voices heard on the world stage
But now another Brics-related phenomenon is emerging. In the early years of Bric-dom, the four countries chosen by O’Neill had different reactions to the designation. There was delight in Russia, bafflement in China, cynicism in Brazil and indifference in India. Now, the countries are using the idea to forge tentative links in reality – not just the world of investment ideas. In May 2008, Russia hosted the first formal Bric summit, a meeting of Bric foreign ministers in Yekaterinburg. In July 2009, it followed this with a formal gathering of all four Bric heads of state.
As meetings go, these were symbolic, not substantive. Although the four countries discussed how they could better co-ordinate their affairs to gain greater influence – and seek alternatives to the dollar – they did not agree any tangible steps. But this year in the early summer, the four countries will meet again, this time in Brazil. In anticipation, the Brazilian authorities are establishing a group of academics and a formal think-tank to brainstorm how to develop the Brics agenda. As part of that, they plan to host a conference next month in Rio – with the participation of O’Neill himself. McKinsey, which has used a version of the Brics concept in its consulting strategy, will also be involved.
It might seem ironic that the four countries would choose a term created by an American bank to define themselves but it is not unprecedented. When countries such as India first developed their sense of national identity and rebelled against the British – or when Soviet republics such as Uzbekistan developed a similar nationalism – they did so using the borders that had also been imposed, artificially and arbitrarily, by an outside power. When the cognitive map is redrawn by a dominant power – even in the world of marketing and investment bank “spin” – it tends not to be erased so much as appropriated.
“Is there much evidence that the Brics countries are collaborating today in practical terms?” O’Neill asks. “Not really, no. But that could change in the future – you look at how Brazil supplies commodities which China needs … or the fact that they all have quite similar ideas about how to manage their economies.”
Or as Felipe Góes, the Brazilian official in Rio charged with setting up the world’s first Brics think-tank, says: “It is somewhat ironic [that we use the word Brics] … but that reflects the fact that in the modern world it is people like Goldman Sachs and McKinsey who have the resources and minds to develop ideas.” Indeed, what makes a large institution such as Goldman so influential these days is not simply its trading acumen and political connections, but also its ability to invest heavily in what bankers sometimes call “thought-leadership”, by funding analysis and ensuring it is read around the world.
At home abroad
Back in New York, some of Goldman’s older managers are aware of the cultural ironies of the Brics boom. During the first 120 years of its history, Goldman made most of its profits from American markets, and today the firm is often viewed as the most politically well-connected of the US banks. If you step into the office of its headquarters at 85 Broad Street, in downtown Manhattan, the first thing that you see is a vast American flag, looming over the dull brown marble lobby. Yet appearances can deceive. While O’Neill has spent the past decade trying to carve out his own intellectual niche by promoting the Brics, so too – far more discreetly – Goldman has been remaking itself, building activities outside the American heartland to capture the growth that O’Neill forecasts. In the past decade, the bank has opened more offices across the world than in the whole of its previous history, and while revenues from the Americas accounted for 60 per cent of its earnings 10 years ago, they now represent about half (and far less if Latin America is excluded). Indeed, senior Goldman executives expect that within a few years, profits that are “made in America” will be a minority of total earnings.
That pattern is certainly not unique to Goldman Sachs: most other western banks have also been expanding across the globe in the past few years. Deutsche Bank, for example, has been deftly building an emerging markets derivatives franchise, while HSBC is now so convinced that its future lies in Asia that Michael Geoghegan, chief executive, recently relocated to Hong Kong from London.
Still, the swing is particularly striking at Goldman, given its all-American past. These days, one of the buzzwords at 85 Broad Street is “domestification”, or the idea that the bank must build businesses around the world that provide local clients not simply with international services, but also with services in their local markets. Rather than treating non-western countries as far-flung frontiers or pawns in a trading game, the new corporate rhetoric insists that the Brics (and other non-western countries) are markets in their own rights. Thus in Brazil, Goldman recently started selling Brazilian investment funds to Brazilians. In Japan, there are staff who speak barely speak a word of English. And in China – where Goldman Sachs most certainly does not fly a big US flag – the bank is sponsoring a Chinese business school, to ensure access to a stream of authentically local Chinese students.
This drive is going hand in hand with a complex process of cultural engineering. As the bank acquires more non-western staff, it is devising programmes to rotate its locally hired employees through headquarters, to ensure that they learn “Goldman values”. It also takes care to send staff from New York and London out to the regions, and to shuffle different ethnic groups between different regions.
As its sponsorship of Chinese business schools shows, Goldman is trying to raise a new generation of local leaders. “If you look at the history of the London office of Goldman, you can see how over a decade or two, you can have locals rise to the top,” says one top executive. “That is our goal across the world. The idea is to get embedded, to show that we are there for the long term … but also to ensure that our Goldman values are everywhere in the world.”
It all might sound reminiscent of the way the British empire operated in the 19th century – or the way the Russian Communist party once tried to knit the diverse peoples of the Soviet Union into a single ideologically based nation. Only this time, it is MBA programmes and Goldman training courses, rather than British public schools or communist training camps, that provide the cultural glue. And – perhaps most important of all – Goldman Sachs (unlike earlier empires) is not overtly acting with a nationalist or political agenda; insofar as it has a real loyalty, it is to its own bottom line and its ability to make profits.
Put it another way: Goldman will keep flying Old Glory only as long as it believes that there is profit to be made under that banner. No wonder a senior member of the US government remarked a couple of years ago, partly in jest, that sooner or later, Goldman “is going to have to choose whether it wants to really be American or not”. If O’Neill is even half-right in his predictions, it may not be a straightforward choice.