From BRICs to PIGS: what’s in a name?

First there was BRICs. Then came CIVETS. Then we were presented with BASIC, CRIM, BRICK, CEMENT, BEM, N11 and the 7% Club. Now barely a week goes by before someone tries to float another ‘useful’ investment acronym.

Behind the dense forest of exotic acronyms is a simple fact: the catch-all classification ‘emerging markets’ has lost much of its usefulness. It was invented in the 1980s, by World Bank economist Antoine van Agtmael, to replace the now-defunct acronym LEDCs (or ‘less economically developed countries’) by which the West had until then blithely referred to the rest of the world. The term ‘emerging markets’ served as a useful way to refer to fast-growing although crisis-prone markets like Russia, China and Mexico.

Within the term ‘emerging markets’ was quite a 1980s-assumption: these markets would follow the development route laid down by ‘developed’ economies, until they arrived in the neo-liberal end point reached by the US, the UK and other western countries. And the phrase also came to have strong associations with the currency and debt crises of the 1980s and 1990s.

But things have changed. The bigger emerging market countries have now overtaken the weaker developed markets, not just in total GDP, but also in the pricing they pay on their sovereign debt. Emerging market countries like China and Russia have accumulated trillions of dollars in foreign exchange reserves, and are now the main creditors of western sovereigns. In the 1980s, emerging markets depended on the west for capital inflows. Now the situation is reversed, and the US and EU depend on China to buy their sovereign debt.

It was partly to recognize this shift in economic power to emerging markets that Goldman Sachs economist Jim O’Neill introduced the now-famous acronym BRICs (Brazil, Russia, India and China) in 2001. It was a runaway success. A decade on, and MSCI has launched a BRIC index, there are several BRIC-focused funds, BRIC-focused blogs, BRIC conferences, and the leaders of the BRIC countries even held their own BRIC summit in 2009. 

However, the success of the acronym, and the increase in capital flows to BRIC markets that followed, quickly led to questions and criticisms of the BRIC tag. In 2008, for example, when Russia’s economy slid into recession following the war with Georgia and the Credit Crunch, some analysts suggested Russia should be dropped from the grouping. This suggestion was sufficiently alarming to Russia that it organized not one but two BRIC summits in Russia in 2009. .

Beyond BRICs

Some analysts and economists have pointed out that the BRIC grouping misses out as much as it includes. Jerome Booth of emerging market fund manager Ashmore Investment says: “I came up with CEMENT: Countries in Emerging Markets Excluded by New Terminology.” What, for example, about Indonesia, which has a bigger population than Russia, greater political stability than India, and an economy set to grow by 7% in 2011? Both Morgan Stanley and emerging market fund manager Templeton have suggested turning the BRICs into BRIICs.

What about Turkey, which emerged from the Credit Crunch in remarkably robust health? Its stock market is up 12% year-to-date, while the MSCI BRIC index is down 2%. Turkish president Abdullah Gul told the Financial Times it “wouldn’t be surprising we start talking about BRIC plus T” – although that acronym hardly rolls off the tongue.

Other investment banks, perhaps jealous of the kudos Goldman won with its BRIC creation, have tried to make their own acronyms go viral. HSBC’s ex-CEO Michael Geoghegan tried to float CIVETS: Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. He said: “Each has large, young, growing population. Each has a diverse and dynamic economy. And each, in relative terms, is politically stable.”

But investors did not take CIVETS to heart (one says: “BRIC sounds big and serious. Isn’t a civet some kind of animal hormone gland?), and the acronym lasted little longer than Geoghegan, who is departing from HSBC.

Rival firm Standard Chartered has tried this year to introduce the ‘7% Club’, which would include any market whose economy is growing at rates of 7% a year or more. Standard Chartered says: “Focusing too much on BRICs has its limitations. One is that there are several other countries that are not far behind and could plausibly be in the top four within a decade or two, most likely displacing Russia or possibly Brazil.”

Having an acronym with a fluid membership allows for any outperformers to join and underperformers to drop out. But the 7% membership rule makes for some strange members in the club: China, India, Vietnam, but also Turkmenistan, Sudan, Sierra Leone and Chad. Anyone for Sudanese debt?

Goldman Sachs’s Jim O’Neill has sought to create a new acronym to acknowledge the rising stars coming after the BRICs in emerging markets: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam. He has dubbed these countries the ‘Next 11’, which is probably catchier than, say, SKIVE PIMP BNT.

The NEXT 11 tag has already had some success – Castlestone Management launched a Next 11 fund in August 2010, and BNP Paribas launched a Next 11 ETF.  Jeffrey Sacks, emerging market debt portfolio manager at Principal Global Investors in New York, says: “The Next 11 tag is interesting because it catches the middle tier of rising stars, and all the markets in it share quite similar economic fundamentals.”

Its the PIIGS, STUPID

Meanwhile, a sign of the times of how bad things have got for developed markets is analysts have started to invent acronyms to group them together in ‘bad groups’. The main example of this is the PIGS acronym, for the weaker Eurozone economies of Portugal, Italy, Greece and Spain, although some analysts prefer to include Ireland to make it PIIGS.

No one has owned up to inventing PIGS, indeed, Barclays Capital analysts have been banned from using it, as it has led to fury among PIGS policy-makers, with one Portuguese politician calling it a racist plot fried up by the British media to deflect attention away from the weak UK economy. The British press responded by inventing its own acronym, STUPID, to include the high deficit economies of Spain, Turkey, UK, Portugal, Italy and Dubai.

But some investors warn that such acronyms, droll as they are, can make the markets less safe. Gerard Fitzpatrick, senior portfolio manager at Russell Investments in London, says: “These acronyms can spread systemic risk. They create herd behaviour, with investors mindlessly running from anything tarred with the PIGS brush.” Jerome Booth agrees: “The problem with all these acronyms is they’re short-cuts. They save you the effort of thinking. Thinking is hard work.”

But these sorts of neural shortcuts are not confined to acronyms. There are many types of classifications and groupings that have a big influence on investor behaviour, but which can be arbitrary or misleading if followed too religiously. Perhaps the most influential classification is how sovereigns are treated by big index providers like MSCI and S&P’s.

For example, investors and analysts have been expecting MSCI to upgrade Taiwan and South Korea, both of which are investment grade, to ‘developed market status’. However, it has yet to do so, despite other indices like S&P and FTSE graduating these countries.

Bankers in the GCC have also long been waiting for MSCI to upgrade GCC markets like the UAE from ‘frontier’ to ‘emerging’, which would instantly lead to large capital inflows from index-tracker funds. But so far they’ve waited in vain.

Another huge driver of investor behaviour is the stamp given sovereigns by rating agencies. Indeed, whole economic policies are designed with a view to preserving ratings, as the British government’s anxiety about the UK losing its AAA sovereign rating show this year. Much of Russian finance minister’s economic policy from 2001-2003 was designed to win Russia an investment grade credit rating, which it finally did in 2003 – although financial reforms notably dropped off following that achievement.

The loss of investment grade, meanwhile, can be a traumatic event – take Standard & Poor’s downgrade of Greece to junk status in April 2010, which was enough to cause the EU to call for rating agencies to act in a “responsible and rigorous way”, during “this very difficult and sensitive period”. The other rating agencies then followed suit, leading to Greece falling out of the MSCI investment grade index.

The rating a sovereign is given has a huge impact, then, on its market perception and on its domestic economic policy – on government spending on schools, hospitals and other critical public services.  And yet, if the Credit Crunch has shown anything, it is that rating agencies are over-worked and under-qualified organizations manned by analysts who would often far rather be working at an investment bank. They are just as prone to inaccuracy and fallibility as other areas of the market.

One investor says: “There are all sorts of classifications and generalizations that get slavishly followed and  which prevent people from looking at fundamentals. And the media is responsible for a lot of it. It’s journalists who are most obsessed with coming up with catchphrases, or awards, or lists of ‘who’s hot’. Too many investors outsource their thinking to analysts or hacks. People need to think for themselves.” Think for ourselves? PIIGS might fly.

Enjoy this? There’s more by me on psychology and philosophy at my blog, The Politics of Wellbeing.