From BRIC to BI, the cloudiest outlook for emerging markets since the global financial crisis

Global Perspective

March 11, 2020

What happened

While market participants focused on whether the Chinese markets were investable or not, the Russian market abruptly became uninvestable as widely-tracked index providers MSCI Inc. and FTSE Russell decided to cut Russian assets from their emerging markets indexes with blazing speed. BRIC, the acronym that is often used to show the strength and resilience of emerging markets leaders: Brazil, Russia, India, and China, got shortened to BIC. Additionally, the Chinese authorities' preference for "common prosperity" rather than the strength of private enterprise could keep international investors at bay until the attitude significantly improves towards the privately-owned entities. Consequently, BIC has become shortened even further to just BI.  

Our take

Russia: A regime change is needed to regain global investors’ trust

The Russian stock market has been closed since February 25th with no indication of when it will reopen. And when it does reopen, foreigner investors will most likely be restricted from selling Russian assets. Global investors that were invested in Russian stocks and bonds have been either forced to sell them at extremely depressed prices if they can locate liquidity or write them down to zero. Even if there is a cease-fire and an eventual peace agreement, it could take years for Russia to regain entry in those global indexes. More accurately, without a regime change in Russia, global investors may refuse to invest in Russia, even if the current situation is resolved peacefully. 

Stock exchanges globally have stopped trading exchange-traded funds (ETF) that are invested in Russia, leaving investors with stale positions. Removing a country from an index after substantial losses crystalizes those losses at the index level (Chart 1). Even if the stocks recover, the index will not capture those gains.

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