Brazil, Russia, India and China have long been the darlings of emerging market investors. Now, though, cracks have appeared among the BRICs. After generally outperforming broader emerging market equities since January, the big four combined reversed the trend last month.
At the same time, investors showed a much stronger desire than usual to differentiate between the high-flying countries, eschewing those with more exposure to falling commodity prices and perceived vulnerability to a slowing global economy.
The moves provide yet more evidence that financial markets are poised at a turning point, trying to adjust to a cyclical slowdown of unknown magnitude after some of the most robust economic growth in decades.
The BRICs, which are lumped together because of their size, dynamism and potential as economic powerhouses, are particularly significant because they have been both drivers of this growth and some of its greatest beneficiaries.
MSCI's BRIC equity index is up more than 22 percent year-to-date, despite the sharp May-June global correction, while the broader emerging market equivalent has gained only around half that.
In September, however, the broader gauge rose 0.65 percent - which would bring a modest 7.8 percent gain if stretched over a year - while the BRICs lost, down 0.35 percent.
Other MSCI indexes suggest, however, that it was what happened among the individual BRIC countries that caused the underperformance rather than as a group itself.
China and India continued to rise, while Brazil and Russia fell back. Flow data from Emerging Portfolio Fund Research (EPFR) confirms the trend. In the week ending on September 27, Chinese and Indian equity funds had a net $377 million in inflows. BRIC funds as a whole had a third straight week of net redemption's. "Investors may be concluding that they don't like the Brazil and Russia exposure that these funds contain," EPFR said.
While there are some specific factors that may have influenced this divergence - Brazil's elections, a need to cool Russia's red-hot bourse rally - it is the differences between the BRICs countries that lie at the heart of the change.
First is the role of commodities, whose prices have been falling after a remarkable five-year rally. Oil in particular has tumbled, dropping around 25 percent since a mid-July peak.
This has directly opposite effects on the BRICs. "The two markets that are seeing the inflows are (those with) demand for commodities. The two that are seeing the outflows are the suppliers of commodities," said Julian Mayo, investment director at Charlemagne Capital.
Similarly, investors appear to be deciding that commodity-suppliers Russia and Brazil will not weather a slowdown in the United States as well as the others.
"The reason why China and India are doing well is because those countries can still do pretty well if the US goes into recession, which is the thing that markets are worrying about," said Maarten-Jan Bakkum, emerging markets equity strategist at ABM Amro Asset Management.
To date, however, the impact has mainly been seen in equities. Boosted by a lack of global supply, Russian and Brazilian bonds, among the world's most liquid external sovereign debt, have held up quite well. China and India are not significant players.
How long the current division lasts is probably - like much else on financial markets these days - hostage to the depth of the US slowdown and the continuing easing of commodity prices.
But investment rotation among the four countries is likely to remain a feature given investors' different views of their short- to medium-term prospects. For example, AXA Investment Managers' WF Talent BRICK Fund - the K is for South Korea - looks for entrepreneur-led companies, but wants to steer clear of those linked to oil.
Guillaume de Corbiac, who is part of the portfolio team, said this makes the fund light on Russia, where entrepreneurs meeting the criteria are thin on the ground. It finds far more opportunities in China and India.
Charlemagne's Mayo, by contrast, is keener on Russia because of the potential of its population. "Russia is much more than a commodity play. It is a domestic consumption play," he said.
Meanwhile Mark Mobius, the influential emerging market specialist at Franklin Templeton, currently finds valuations in China and Brazil particularly attractive and expects stocks there to outperform India.
Standard Life Investments, however, prefers Russia and India to Brazil. Investors on the cusp of a cyclical change, it seems, are as divided about the BRICs as they are about everything else.
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