Bye, bye BRIC: A new global investment shift takes hold – by Joanna Slater (Globe and Mail – July 13, 2013)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

NEW YORK — When the thirteen members of the investment team at Ballentine Partners LLC sit down each quarter to review their holdings, it is a loud and boisterous affair. Last month, their discussion turned to emerging markets.

The Massachusetts-based firm, which manages $4-billion (U.S.) for ultra-wealthy families, faced a decision: Pare its bullish bet on such countries or stick with it, even as stock prices fell.

The debate circled around the potential dangers for these markets and for China in particular. One agitated analyst pounded the table and called the country’s credit-fuelled expansion a “shell game.”

In the end, the firm’s staff decided to scale back on emerging-markets stocks. “It’s going to be a bumpy time,” said Greg Peterson, Ballentine’s head of investment research. So they decided to act out of caution, he said, to see “how all the issues resolve right now.”

Across the world, many investors are coming to a similar conclusion, watchful and uneasy about the future path of developing economies. In recent weeks, some have fled those markets, sparking marked declines in stocks, bonds and currencies.

The immediate cause of the rout was the prospect that the U.S. will end years of unconventional and ultra-loose monetary policy that drove interest rates to historic lows, and pushed a flood of capital into these emerging markets in search of higher returns. But there is also a deeper re-evaluation going on. Economic growth in three emerging giants – Brazil, Russia and India – has disappointed. China is no longer expanding at a torrid pace. And political upheaval has spiked, as protests flare in places like Turkey and Brazil.

Together, that adds up to a very different picture than the one that greeted investors 10 years ago. What was perhaps the single most compelling investment thesis of the past decade – the all-in bet on the emergence of new economic powers – appears to have run its course.

From 2003 to 2012, the MSCI Emerging Markets index rose nearly 17 per cent a year on average, in U.S. dollar terms. But investments in emerging markets in the coming decade are “unlikely to deliver anything close” to the kinds of returns they did in the last one, Dominic Wilson, an economist at Goldman Sachs Group Inc., wrote in a note to clients last month. “To paraphrase the old expression, these are not your older brother’s emerging markets.”

Mr. Wilson’s opinion carries particular weight: Together with colleagues, he predicted in a report in 2003 that the BRIC nations – Brazil, Russia, India and China – would become an increasingly important driver of the world economy. Their contribution to global growth will remain high, he noted last month, but the real spike is likely “mostly over.”

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