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Nvidia
NVDA,
is probably the hottest stock on Wall Street. The computer chip giant has nearly tripled in value so far this year, mainly on surging excitement about the role its chips will play in artificial intelligence. “In AI, all roads lead to NVIDIA,” as the money managers at Baillie Gifford put it.
Don’t worry about the valuation, goes the line. Just look at the growth.
A similar, if less dramatic, line goes for the rest of the so-called “Magnificent Seven,” the stocks everyone wants to own: Alphabet
GOOG,
Amazon
AMZN,
Apple
AAPL,
Meta
META,
Microsoft
MSFT,
and Tesla
TSLA,
So how timely to see the teetering crisis in Russia, which came close to civil war over the weekend. Because it’s not so long ago that Russia—along with fellow emerging markets China, India and Brazil—were also the hottest tickets in town, and the assets everyone had to own.
Known as the BRICs, they were the Magnificent Seven of yesteryear. They were thought to promise supersize future investment returns, thanks to superior economic growth.
While the developed world stagnated in the aftermath of the global financial crisis, these four markets were the ticket to future profits.
In 2009 alone they went up 90%.
How did that work out? Don’t ask. According to MSCI, which keeps the score on all these indexes, since the end of 2009 the BRICs have earned you a princely total return of 7%.
No, not per year. Total.
That’s including dividends. And before deducting taxes, or costs. Or, for that matter, counting the effects of inflation. In real terms the BRICS have lost you money.
Meanwhile the rest of the world’s stock markets—as tracked by the MSCI All Country World Index, or funds like the Vanguard Total World Stock Index
VT,
—have tripled your money.
It was in November 2011 that SG Securities’ contrarian strategist Albert Edwards published his famous warning note on the BRICs, calling the whole idea a “Bloody Ridiculous Investment Concept.” As Edwards pointed out, investors were plunging into the whole BRIC idea simply because humans are suckers for a good story.
And the BRICs, with their supposed fast-growing economies, offered one. Superior growth would mean superior returns. Right?
The problem, as Edwards pointed out, is that growth does not translate into investment returns. On the contrary, higher growth can lead to really bad long term returns. Why? First, because “high growth” stocks or markets often become too expensive, because everybody gets overexcited by the high growth story and pays too much. And second, because high growth attracts investment attention—which leads to lots of investment in competitors, which in turn drives down returns.
In Russia’s case, the investment euphoria of the 2000s and early 2010s was partly due to the boom in oil and gas prices. But booming oil and gas prices attracted a lot of investment in…more oil and gas drilling, across America and elsewhere. Which led to a plunge in oil and gas prices.
Such is the way of the world. And a cautionary tale about chasing any hot stock boom with your retirement funds—unless you are very aware that you are riding a bandwagon, making a short-term trade for a quick buck, and are disciplined enough to get out.
And here’s a twist in the tale. The BRICs were hot investments because of their promised economic growth. The investments have been abysmal. But the growth showed up. Since 2001, when the BRICs concept was first coined, the four countries in total have grown their collective GDP by an average of 12% a year. That is staggering average growth over two decades. Even Russia has grown by an average of nearly 10% a year.
But this hasn’t helped investors.
Naturally, the political and financial implosion of Russia puts the other three BRICs in the shade. MSCI, having dropped Russia altogether, now calls the remaining three the BIC index—yes, like the ballpoints and the razors and the cigarette lighters. As Russian stocks are now uninvestible, you can basically mark the Russian index down to zero and count it as a 100% loss.
But even if you ignore Russia, the other three — the BICs—have also been a dog since they were in vogue. MSCI reports that its newly-recalculated BIC index has badly underperformed the global stock market, and even emerging markets as a whole, over 3, five and 10 years. It isn’t just about Russia.
And how far back does this go? The so-called BRIC concept was coined in November 2001 by Goldman Sachs economist Jim O’Neill (now, can you believe it, Britain’s “Lord O’Neill of Gatley”). The first dedicated BRIC ETF was launched by iShares in early 2007, when they were rocketing.
But MSCI data now show that the BRIC stock markets have underperformed the rest of the world’s stock markets since August 2003. That was less than two years after O’Neill had first coined the term, and long before most people had ever even heard of it.
By the time the BRICs were popular—2007, and 2010-11, it was already far too late.
Those chasing the next hot story on Wall Street, be warned.
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