The recent BRICS summit in South Africa made headlines for many reasons. The most important was the potential for the BRICS bloc to usher in a new economic world order, that seeks to deviate from the US dollars dominance. It will also seek to redraw trade partnerships for developing nations that are rich in resources and ambition.
Probably the biggest surprise was not so much the expansion of the BRICS bloc, but the countries that are in the process of being added to BRICS. The bloc will increase from the original 5 members to an expanded 11 members with Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates all set to join BRICS in January 2024. The main driver for expansion came from the largest economy in the bloc, China.
Without delving too much into politics, history confirms that they have a difficult task ahead of them. One just has to look at the length of time it took for the European Union to gain traction as an economic block, to realise the magnitude of the task.
If we just consider the size of the US equity markets, within the MSCI World Index, we can conclude that the unwinding of the greenback is not as simple as most BRICS nations would want. Almost 70% of the weighting within the world index is made up of US stocks with the second highest weighting attributable to Japan at 6.13%. Global investors would need to witness a remarkable geographical asset sector rotation to negate the US dollars dominance in equity markets.
Eurodollar bonds are bonds issued by foreign governments, or companies, in USD and pay interest in USD, but are issued outside of the United States. The current issuance of such bonds is conservatively estimated at around $30 trillion -$45 trillion, all with varying maturity dates. These bonds would need to mature before further issuance, if other currencies are to be considered.
A more feasible initial objective for BRICS, would be a greater alignment of trade and economic co-operation. This may take the form of free trade between BRICS countries and advantageous finance agreements.
The BRICS bloc currently accounts for around 45% of the world’s population, but only 33% of world GDP, with rising regional concerns surrounding some of the bloc’s economies, such as:
- Russia has western sanctions in place,
- China’s growth is under geopolitical threats from the West,
- South Africa and Brazil’s economies are both under pressure,
- Saudi Arabia and Iran are not the best of friends,
- India and China have had numerous border disputes.
The BRICS bloc, current and envisaged, has a long way to go to achieve economic alignment and thereafter begin to assert economic dominance on the global economy. There are major differences that need to be ironed out, but ultimately it is their drive around a common economic goal that may provide them the success they so vehemently seek.
There is no doubt that the global economy and investment markets are in a state of transition. What we cannot do is predict the timeline or the specific underlying changes that will take place. The need for a trusted professional financial and investment advisor has never been more apparent.
We encourage you to plan your financial future wisely and let us help guide you through this journey called life.
