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A Dangerous Game Of Scrabble

Abbreviations can be powerful. It is particularly true when they can be pronounced like a word and become acronyms. They represent a form of branding which has the benefit of being short, punchy, marketable, and sometimes mysterious to suscitate curiosity.

To the point where they can be abused to aggrandize concepts that do not deserve it. Twenty years ago, Brazil, Russia, India, and China were merged into 'BRIC.' The idea was to draw attention to the vast, untapped economic potential that the four countries had in common. The genius acronym shaped board discussions throughout the noughties and became even more prominent after the Great Recession. Strategies around the Western world had to incorporate a BRIC component as a priority avenue. No BRIC, no plan.

CIVETS and MINT sought to build on the concept, but less successfully so. They did, however, reinforce the notion that the action was taking place in new geographies. With the financial crisis engulfing the West, the narrative was impossible to resist.

After a good run at the beginning of the millennium, disappointment came in two waves. First came the mid-‘10s. The 2013 taper tantrum reminded investors that many developing economies, including Brazil and India, were closely linked to the U.S. economy and the Fed policy cycles through their U.S. dollar-denominated debt. Then, Brazil and Russia got caught in the 2014-15 commodity crash, evidencing that they, like that of many commodity exporters (e.g., South Africa), acutely lacked diversification. After an excessive outbound M&A strategy, China's economy structurally slowed down, triggering a currency and stock market crisis in 2015-2016. Then, the Trump administration targeted China’s massive trade surplus through tariffs. Only India came close to delivering on its promises. Eventually, the BRIC concept was derided in reports such as 'The BRIC fallacy' (2013) and 'Do the BRICS still matter?' (2015).

The second, lethal wave came over the last few years. Economically, China retreated from the world scene before being more recently ensnared in a disastrous COVID strategy. Russia decisively flipped to the dark side earlier this year. And Brazil has been struggling to make democracy work. The MSCI BRIC Index's underperformance since 2019 has put a nail in the BRIC coffin.

The reality is that there is significant heterogeneity amongst emerging markets. Today, the relevant factors affecting the attractiveness of countries include dependence upon Russia and Ukraine for food, fertilizers, energy, and tourism (Eastern Europe, Egypt, Turkey); commodity exports (Brazil, Chile, South Africa, Indonesia, Nigeria); exposure to China's economy (Vietnam, Malaysia, Indonesia); the level of external indebtedness (Malaysia, Thailand, South Africa, Turkey); politics (Brazil), climate risk (India, Philippines), and exposure to economically vulnerable countries through trade linkages.

By definition, emerging markets represent a source of growth. Discernment, rather than amalgamation, must prevail. Let's stop playing Scrabble with countries' initials.

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