An evolving investment theme that presents opportunities and challenges
The BRICS group, encompassing Brazil, Russia, India, China, and South Africa, has long been a focal point for investors seeking to capitalize on the growth of emerging markets. Originating as a term coined by economist Jim O'Neill in 2001, BRICS has evolved from an investment slogan into a formidable political and economic alliance.
Recently, this group expanded significantly, potentially altering its investment landscape and global influence.
The New Members of BRICS
On January 1, 2024, the BRICS group expanded to include Iran, the United Arab Emirates, Ethiopia, and Egypt. Saudi Arabia was also announced as a new member, although it is still considering the invitation. Argentina was invited but declined to join under President Javier Milei, who opted to align the country’s foreign policy with the United States and Israel instead of China and Brazil. Furthermore, Malaysia and Thailand have expressed interest in joining the bloc, indicating that further expansion is likely.
The Impetus for Expansion
China, one of the world's strongest industrial powers, has been the driving force behind this expansion, aiming to increase its global influence by courting nations traditionally aligned with the US. South Africa and Russia have supported this move, while India and Brazil initially hesitated due to concerns over China’s growing dominance and potential alienation of Western allies. However, both countries eventually agreed to the enlargement, recognizing the benefits of broader cooperation.
For new members, BRICS offers access to financing from wealthier members and a political platform independent of Washington’s influence. This expansion aligns with a broader geopolitical strategy to create a "south-south" cooperative framework, as emphasized by Thailand's Foreign Minister, Maris Sangiampongsa.
Implications of a Larger BRICS
The inclusion of major fossil-fuel producers like Iran and the UAE may enhance BRICS' ability to challenge the dollar’s dominance in global oil and gas trading, pushing for de-dollarization. While this expansion is politically motivated, it also has economic ramifications. A larger BRICS bloc could serve as a counterbalance to the Group of Seven (G7) and other Western-dominated institutions, promoting a multipolar world order.
Achievements and Economic Impact
BRICS has made significant strides, particularly in financial cooperation. The group has pooled $100 billion in foreign-currency reserves to provide emergency liquidity.1 The New Development Bank (NDB), founded by BRICS, has approved nearly $33 billion in loans for infrastructure projects since 2015, including a $1 billion loan to South Africa during the COVID-19 pandemic.2
Trade within the original BRICS members increased by 56% to $422 billion between 2017 and 2022.3 Brazil and Russia’s natural resources complement China’s demand, while India and China maintain weaker trade ties due to geopolitical tensions.
The Origins and Evolution of BRICS
The BRICS concept was initially an optimistic scenario for investors, highlighting strong economic growth in Brazil, Russia, India, and China. The first BRIC summit took place in 2009, and South Africa joined in 2010, adding another continent to the group.
Over time, China’s GDP has outstripped that of the other members, giving it significant sway within the group. However, India has acted as a counterbalance, preventing BRICS from fully endorsing China’s Belt and Road Initiative.
Impact of Russia’s Invasion of Ukraine
The invasion of Ukraine has strained Russia’s relations within BRICS. The New Development Bank froze Russian projects, and Moscow lost access to the BRICS foreign-currency system due to US-led sanctions. This situation has underscored the other members’ need to maintain access to the dollar-based financial system.
BRICS as an Investment Theme Today
Despite ongoing interest in emerging markets, BRICS has become less relevant as an investment theme due to geopolitical shifts and divergent economic trajectories. Sanctions have made Russia off-limits for most investors, and China faces its own challenges, including potential investment bans and a structural economic slowdown. Brazil’s economy has slowed significantly since the end of the global commodity boom, and South Africa struggles with power outages and logistical issues. India remains a growth story, often compared to China’s economic trajectory 10 to 15 years ago, but it is uncertain whether it can replicate China’s manufacturing-led model.
Opportunities and Challenges Abound
The BRICS group’s expansion and evolving geopolitical landscape present both opportunities and challenges for investors. While the bloc’s political influence grows, economic disparities and external pressures have made it a less cohesive investment theme.
Investors must navigate these complexities to capitalize on the potential within these emerging markets.
Sources
2-3. How BRICS Became So Much More Than Just a Slogan (Bloomberg)
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by FMeX.
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