Crushed Brics

Bearbull’s Chinese relatives have gruesome tales to tell about lockdown in Shanghai. Much sympathy should go to those who woke to find the lift doors on all the apartment blocks in their compound welded shut. Okay, food is available for delivery, though at a price. So it wasn’t a smart move when one local food vendor posted on Weibo that his takings for March were the sterling equivalent of £3mn, about 30 times the usual amount. His regulars won’t be happy when next they meet him and the long arm of the local authority will be waiting for its tax take.

And real pity to those residents trusting enough to leave their domestic animals behind as they left for Shanghai’s ‘zero-Covid’ camps. This time, the long arm of the local authority came clad in hazmat suits and bearing metal bars to club the animals to death. The outrage posted on social media eventually curbed the excesses, but the damage was done.

Meanwhile, the damage a shutdown in China’s biggest city is doing to the country's economy is still being quantified, not forgetting the likelihood of a nationwide programme of fierce lockdowns for as long as the Party clings to the pursuit of zero-Covid. As a result, investors are dumping shares and economic forecasters are busy scaling back their estimates for 2022’s growth.

This week’s panic attack has meant a 10 per cent drop in the SSE Composite index in six days trading to 26 April. That also means the SSE, the most widely followed index of China’s equities, has fallen 20 per cent in the year to date. And, in an update earlier this month, the International Monetary Fund (IMF) reckoned that a 4.4 per cent rise in inflation-adjusted gross domestic product (GDP) was all that could be had from China’s economy this year as it increasingly comes up against the constraints of size.

To put 2022’s possible figure into context, in the 2010s the pace of China’s GDP growth averaged 7.7 per cent a year; in the 2000s it was 10.3 per cent, and in the 1990s 10.0 per cent. True, the IMF forecasts a moderate spurt in 2023-27, but that only means about 5 per cent a year. What else can you expect from the world’s second biggest economy by gross value added however the figure is calculated, and now the biggest if GDP is based on purchasing-power parity, which adjusts for differences in living costs from country to country?

The stock-market repercussions of this secular slowdown are shown in the chart and in Table 1. No longer is China’s equity market the only one that counts among the so-called Bric nations (Brazil, Russia, India and China), let alone among emerging markets as a whole.

As the chart and tables so plainly show, Russia is the basket case; both as a destination for equity capital and as a thriving economy. But it was ever thus, or at least since the idea of Brics was conjured up. As to why, Russia may have more in common with the oil-rich autocracies of the Middle East than with the other Brics. It suffers the world’s worst case of the ‘curse of oil’, where access to the rents that can be captured by the state, and its agents, from vast minerals resources reduces the need to develop other parts of the economy. The curse even acts as a disincentive to develop them, since development means change and change threatens the entrenched elite. For all their failings – and despite their size – neither China nor India suffer this particular shortcoming. Brazil comes close, but too many brief encounters with democracy and the need to tax its citizens heavily so as to fund a developed world’s welfare state on a developing world’s income keep it on the right side of virtue – just.

India’s bustling stock markets – quantified in the chart via the 30 blue chips that comprise the BSE Sensex Index – are the current winners. For those of us who take little notice of India’s markets, this is a surprise; doubly so, perhaps, because the Sensex index bears more resemblance to the low-tech and stodgy FTSE 100 than the high-tech and flying Nasdaq 100. Sure, India’s expertise in IT services is represented by the likes of Tata Consultancy Services (IN:532540) and Infosys (US:INFY), but chiefly the index is a repository of companies that make the physical stuff on which the world goes round – cars, cement, machinery, paints, processed foods with some banks to provide the finance chucked in.

True, India’s economy has been in bouncing mode for some months, but that’s not so very different from much of the world prior to the onset of war in Ukraine. GDP dropped by 6.6 per cent in 2020 as the biggest wave of Covid crashed in. But output recovered strongly in 2021 – GDP was up almost 9 per cent on the year – and is expected to continue at a good clip. So much so that, in contrast to expectations for China, India’s pace of growth is expected to accelerate in the mid-2020s. For the six years 2022-27, the IMF forecasts average GDP growth of 7.0 per cent. If achieved, that will be faster than the 10-year averages for each of the past three decades ending in 2019.

What’s tougher to explain is why India’s economy is progressing so well since the rule of Narendra Modi’s BJP party, now coming up to eight years, is supposed to be almost everything that discourages economic growth – divisive, exclusionary, corrupt, centralising and with a neat side-line in undermining the rule of law. Of course, this sounds like a template on which almost all of the world’s failing democracies operate and that does not stop them posting enough growth to get by. All of which may simply show that a government can do all of the wrong things and still get acceptable results provided that some big factors are moving in its favour.

For India, more than anything that means a huge labour force. A median age of almost 29 (see Table 2) as part of a population pushing 1.4bn, and soon to overtake China’s, gives India the world’s fattest demographic dividend, especially as a comparatively high proportion of its population is still rural. That should mean it is ready to shake off what Marx labelled “the idiocy of rural life”, move to the cities and do something economically worthwhile.

Of course, this is far easier said than done. Compared with the rest of Asia, India’s untapped labour pool is poorly qualified and its infrastructure lacking or unreliable. Besides, it is unclear whether a big pool of cheap labour alone can still take a nation far along the path to affluence. Increasingly, capital equipment can do a more profitable job than cheap labour where low skills are all that’s needed.

In which case, China’s leaders should be happy the Middle Kingdom’s demographic dividend is mostly spent. It will have taken the nation about as far as it could, but – ominously – may still leave China getting old before it gets rich; and before it has a welfare system to cope with a nation of geriatrics. Combine that with the sinister gender imbalance prompted by China’s disastrous – and unnecessary – one-child policy and it is easy to imagine its demographic horror show doing to its equity markets what Japan’s demographics have done to its stock-market performance these past 30 years.

So it might be unwise to assume a bit of mean reversion – a powerful force – will shift Shanghai’s SSE Composite index back to the top of that chart. Yet it might also be heroic to assume the BSE Sensex index – now trading on an earnings multiple of 24 times and a price-to-book ratio of 3.5 – can continue to escape mean reversion. But that’s rather how it is with the Bric equity indices. Separately each them has its day, though Russia’s RTS index only very occasionally. Together, they are generally a disaster. Brics as a collective way into investing in emerging markets is much like Brics as an economic concept – both have been crushed.

bearbull@ft.com