What was the hottest acronym in investing has in the course of the past year become a group of BRICs weighing down investment portfolios. Shares listed in emerging markets, as represented by the heavyweights of the pack - Brazil, Russia, India and China - have had a dreadful 12 months.
Chinese share prices have been down about 20 per cent in the past year. Russia and India are flat.
Brazil is the only one to have given a decent performance in the past year - returning more than 10 per cent.
The four are the largest emerging markets economies. They account for almost 3 billion people, or slightly less than half the world's population. China has the largest economy among the BRICs and is on track to become the biggest economy in the world, perhaps as early as 2030.
A senior investment analyst at Lonsec, Steven Sweeney, says the poor returns have prompted a bout of head scratching from many emerging-markets investors. They are faced with the "nonsensical reality" of US and European shares outperforming emerging markets. US shares have been about 20 per cent higher in the past year and about 12 per cent higher since the beginning of the year.
British shares are about 10 per cent higher for the year and even euro zone shares have held steady in the past year.
Yet the economic fundamentals of the BRICs and the euro zone could hardly be more different. The euro zone debt crisis is in its third year, while the public finances of the BRICs are relatively good.
The US economy may be growing at an annualised 2 per cent, but company profits have grown rapidly in the past three years.
Perhaps another reason for the rally in US shares is that they have done nothing since the tech wreck of 2000. The stabilisation of European share prices is harder to explain. Maybe it is just relief that things could not get much worse and the rally may be short-lived. Australian share prices have been trading within a narrow range for the past year.
The argument for investing in emerging markets shares and global shares generally is not because they will produce spectacular returns.
It is to diversify an investment portfolio and lessen the impact of possible ongoing lacklustre returns from Australian shares.
It is the changing dynamics of the Chinese economy that will have the most profound implications for Australian investors.
"As China shifts gear from an export-led to a domestic-consumption-driven story, it may be increasingly difficult for Australian investors to gain exposure to the Asian consumption story through holdings in Australian resource stocks," Sweeney says.
He says there are signs of dampening demand for Australian resource stocks as the commodity cycle appears to have peaked. "This shift may reduce the Australian equity market's historical performance correlation with emerging markets."
The other mainstay sector of the Australian sharemarket, banking, appears to be at the top of the cycle. Lending remains subdued as consumers stay cautious. The arguments for diversification away from Australian shares have rarely been stronger.
Frequently Asked Questions about this Article…
What happened to BRICs (Brazil, Russia, India, China) over the past year?
The article says BRIC shares have underperformed in the last 12 months: Chinese share prices were down about 20%, Russia and India were roughly flat, while Brazil was the standout with a return of more than 10%.
Why have US and European shares outperformed emerging markets like the BRICs?
According to the article and Lonsec analyst Steven Sweeney, US shares were about 20% higher over the past year (around 12% higher year-to-date), helped by strong company profit growth over recent years. British shares rose roughly 10% for the year and euro‑zone stocks have held steady — outcomes that feel puzzling given weaker fundamentals in parts of Europe but reflect stronger corporate results and investor sentiment in the US and UK.
What is the main reason everyday investors should consider emerging markets or global shares?
The article stresses that the primary reason to hold emerging-market and global shares is diversification — not to chase spectacular short‑term returns. Diversifying into global markets can help reduce the impact of potentially weak returns from Australian shares.
How might China's economic shift affect Australian investors and Australian resource stocks?
The article highlights Lonsec analyst Steven Sweeney’s view that as China shifts from an export‑led model to one driven more by domestic consumption, it could become harder for Australian investors to access Asian consumption growth via Australian resource stocks. There are signs of dampening demand for resource stocks as the commodity cycle appears to have peaked.
Does the article suggest the commodity cycle has peaked for Australian resource stocks?
Yes. The article reports Sweeney’s observation that the commodity cycle appears to have peaked, and that this dampening demand for Australian resource stocks may reduce the historical correlation between the Australian equity market and emerging markets.
What does the article say about the Australian banking sector and consumer lending?
The piece notes that banking — another mainstay of the Australian sharemarket — looks to be at the top of its cycle. Lending remains subdued because consumers are cautious, which is one reason the article argues the case for diversifying away from Australian shares is strong.
Should I move my portfolio into emerging markets now based on this article?
The article does not give direct buy/sell advice. Instead it explains that emerging markets are useful for portfolio diversification rather than guaranteed outperformance, and that investors should weigh changing dynamics (like China’s structural shift and the commodity cycle) when deciding how much emerging-market exposure makes sense for their own goals and risk tolerance.
Who is Steven Sweeney and why are his comments in the article important for investors?
Steven Sweeney is identified in the article as a senior investment analyst at Lonsec. His commentary frames the recent disappointing returns in emerging markets, explains why US and European shares have been relatively strong, and outlines implications for Australian investors — particularly around diversification, commodity demand and the China transition.
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