Investment implications of the rise of Brics+
To access investment opportunities effectively, one has to be more active and thematic as opposed to passive, changing the investing playbook of recent decades
INVESTING over the past three decades has relied on assumptions about three key dynamics that have underpinned the global order in the post-Cold War era: unfettered free trade, globalisation and world peace being assured under the Western-led international system.
These dynamics have been synonymous with the free movement of goods, capital, people and information, and the absence of systemic conflict between rival powers.
Now, however, all three premises can no longer be taken for granted and are in fact being challenged at a time of profound change in the global geopolitical and economic order.
US President Donald Trump’s sweeping tariffs and China’s stinging retaliatory measures are symptomatic of a new contest for global leadership that is reshuffling the geopolitical and economic world order. This tectonic transition is upending all these three dynamics, and a major rethink of the way we approach investing is due.
Rise of Brics+ and tectonic transition in the geopolitical and economic order
Originally a loose alliance of Brazil, Russia, India, China and then South Africa, Brics+ now extends to an array of partner countries representing almost half the world’s population. In an increasingly polarised world, Brics+ is developing as a counterweight to the G7 by giving agency and influence to countries in the Global South that are dissatisfied with the existing international system. Moreover, the coalition is gaining momentum as an entity by organising its collective resources and markets to challenge and disrupt the Western-led international system.
This maturing alliance serves as a mechanism for China to reach important markets that are not politically aligned with the US and its coalition. Beijing’s relationships help it secure access to crucial resources and to extend its influence – all while hedging against restrictions on access to US and European markets, or potential future sanctions.
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Brics+ presents a formidable challenge to the West in many crucial areas: technology, energy resources, a broad range of critically important commodities, control of major maritime and trade choke points, expanded military capabilities, and favourable demographics.
These compelling assets explain, in part, the Trump administration’s focus on changing the established practices of the global economy. Under Trump, the US is seeking to slow the ascent of Brics+ and China before they become the dominant alliance in a new geopolitical era. The unipolar, post-Cold War period – centred on the US has ended. What comes next isn’t certain, but for now it resembles at least a bipolar competition between the US and China, each with its respective coalitions.
Investment opportunities
The rise of the Brics+ is grounds to pause and reflect on the asset management practice, particularly as our analysis suggests this evolving coalition of nations and the increasingly fractured world order will have profound effects on the way we approach investing, and the way we categorise asset classes.
We are accustomed to dividing assets into those from developed and emerging markets. Developed markets are widely seen as enjoying high liquidity, low political risk, high gross domestic product per capita, advanced technologies and exports from a variety of sectors. Emerging markets are usually seen as offering high potential growth but lower liquidity and a narrower scope of investment opportunities, while carrying greater political risk and potential volatility.
However, today’s increasingly fractured world is marked by growing barriers to trade, the increased segmentation of markets, and an evolving set of growth drivers. This calls for a reframing of the way investment opportunities are considered to take a more thematic approach. Investment themes could now be present or absent in markets that were previously thought of as developed or emerging.
In particular, investment opportunities are likely to revolve around the key determinants of future growth: technology, energy supply, commodities/resources and productivity advantages. While these drivers have always been important, their nature is changing. Growth in technology is increasingly chip and artificial intelligence (AI)-related; energy concerns not only fossil fuels but also green and nuclear energy; and commodities/resources include rare earths and minerals that are becoming highly sought after.
Productivity advantages now come from AI and robotics. This means the mix of the growth drivers, and the intensity of their use, is changing. There is a lot more need now for energy, for example, due to new technologies that are energy intensive.
The changing profile of growth drivers implies a corresponding reshuffling of the economic pecking order of countries and their industries. This requires that we think thematically about countries’ exposure to the drivers of future growth. Some G7 and Brics+ members have compelling advantages in these areas, including natural resource endowments that distinguish them from other countries. China, with its strong grip on the production of the critical minerals and rare earths needed for the green transition, possesses many advantages.
Brics+ levers of potential global influence also extend to maritime trade routes, energy resources and military capabilities. Trump’s renewed interest in acquiring Greenland and keen interest in the Panama Canal can be understood in this context. At the same time, not all developed markets will be able to hold on to the sources of growth that got them where they are today.
The rich natural resource endowment of Brics+ positions the alliance well to harness these future sources of growth, which will be highly prized in a fragmented world marked by divided economic clusters.
If the coalition manages to effectively leverage the full array of tools and influence at its disposal, the gains in growth that the alliance has already helped some of its members achieve could spill over to a wider group of developing nations, accentuating the associated pivot away from Western-centric trade patterns.
Thematic investing and private markets
Economic resilience will be a national priority for many countries. They will be prompted to diversify and focus on their industrial strategies – as evidenced by Trump’s promise to “supercharge our domestic industrial base”. Efforts to bring production home are potentially inflationary in the short to medium term.
Policy uncertainty and political risk are rising. Investors will need to think thematically about countries’ exposure to the drivers of future growth: technology, energy supply, commodities/resources and productivity advantages.
Relationships within and between coalitions are bound to change and evolve. Less globalisation and more restricted capital flows imply lower liquidity in the markets. The effect may be further intensified by the bigger role that private markets will continue to play.
This new world will also have less risk sharing and a lower capacity to absorb supply chain shocks, or other disruptions. With higher volatility, the risk exposure of portfolios may need to be reduced going forward, thereby reducing the overall leverage that needs to be employed.
The upshot of these shifting economic dynamics is a need to fundamentally rethink how we approach investing and how we define and categorise assets in asset classes. The increasing fragmentation of the world economic order and its polarisation may imply higher volatility, lower liquidity and potentially higher inflation as the competing poles try to build capabilities independently of each other. With fragmentation, the cost of capital could become more localised in each bloc, raising its cost.
As the drivers of growth become increasingly thematic and divisions between the poles grow, the need for companies to go public may decrease as they seek to protect their intellectual property. With public and private companies each offering access to different segments of the market, this suggests a multi-asset approach to investing – using both private and public market securities – may be more conducive to capturing growth in the evolving economic and market conditions.
All these developments suggest that to effectively access investment opportunities, one has to be more active and thematic as opposed to passive, changing the investing playbook of recent decades.
The writer is head of Pictet Research Institute
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