In August last year the BRICS summit convened in Johannesburg.
Six new members (Iran, Saudi Arabia, Egypt, Argentina, the UAE and Ethiopia) joined the existing five members (Brazil, Russia, India, China and South Africa), and the group now accounts for almost half the world’s population.
It is the latest challenge to the unipolar world, dominated by the US, that has existed since the second world war.
The rules under which most of the world’s monetary systems operate were established by the 44 allied nations at Bretton Woods in 1944.
These rules have been in place, largely unchallenged, ever since.
However, many of the world’s emerging powerhouses have grown increasingly frustrated with the dominance of the US in the global financial system, and are pushing for a move to a multi-polar world, where countries such as India, China and Brazil would have power and influence to match their population size and economic might.
The shape of this multi-polar world is still open to debate and will take time to emerge. However, it is already evident in shifting trading patterns across the globe.
There has been a significant decline in trade between China and the US, for example, as tensions have mounted between the two superpowers, while intra-Asia and intra-emerging market trade has increased.
Conflicts in Ukraine and Gaza have created further polarisation, with countries increasingly being asked to ‘pick a side’ on global disputes.McKinsey reports that China’s share of US imports declined by six percentage points between 2018 and 2022, while those of emerging Asia, frontier Asia, and India increased by 4.4 percentage points.
Asian countries’ trade with China grew rapidly.
Trade between China and Vietnam and Malaysia grew by 16 per cent and 13 per cent over the same period. Brazil exported $106bn (£83bn) to China in 2023 – the first time it has ever topped $100bn with a single country.
The UN Conference on Trade and Development’s latest global trade update shows that global trade patterns are increasingly influenced by geopolitics, with countries showing preferences for politically-aligned trading partners.
Conflicts in Ukraine and Gaza have created further polarisation, with countries increasingly being asked to ‘pick a side’ on global disputes.
Corporates have been caught in the crossfire; the US government, for example, has sought to restrict exports of key technologies to China.
Semiconductor groups such as ASML and Nvidia have been forced to adapt.
De-dollarisation
Historically, emerging markets have been forced to hold significant reserves of dollars to buy the natural resources, such as energy, that they need to grow.
This has been a particular problem for countries, such as India, which do not have a lot of dollar revenues.
However, as part of this shift, an increasing amount of global trade is now being conducted in local currencies. In Latin America, for example, there is increasing commodities trade using the Chinese renminbi.
JPMorgan research finds that de-dollarisation is particularly evident in FX reserves.
Admittedly, this still has a long way to go.
In its long-term capital market assumptions report, JPMorgan Asset Management said: “Although China’s share of global foreign exchange reserves (2.9 per cent) has increased sharply in the past four years, it remains a fraction of the US dollar’s (58.9 per cent) and less than the combined holdings of the Australian and Canadian dollars in foreign exchange reserves (4.4 per cent).
“For the renminbi to become a reserve currency, significant changes would be needed in China’s financial infrastructure.” The euro is far closer, at more than 20 per cent.
Who wins?
The shift to a multi-polar world will not happen overnight, but for investors, it could be worth looking at those countries that are likely to benefit from this shifting world order.
The strongest economic gains are likely to be made by countries that can play both sides. This is known as ‘bamboo diplomacy’, where policy can flex with the geopolitical wind.
India, for example, has shown itself adept at forging a neutral path between competing geopolitical interests.
At a forum in June 2023, Russia’s President Vladimir Putin talked of “our friends in India and our big friend, Prime Minister Narendra Modi”, while praising the country’s economic innovations.
It is not always easy to play these macroeconomic trends in a portfolio.India has continued to be a major buyer of Russian fossil fuels. However, its relations are still friendly with Washington and India/US trade is now worth around $190bn.
This puts India in a prime position to gather inward investment from both sides.
The Indian government has started to offer tax benefits, subsidies, and streamlined regulatory procedures to attract foreign direct investment and promote domestic manufacturing. This should support long-term economic growth.
Vietnam has also played its cards well. Its foreign direct investment surged 54 per cent in the first 10 months of 2023 as companies such as Apple shifted manufacturing there.
A recent visit from US President Joe Biden upgraded the trading relationship between the two countries, but the Vietnamese government remains on friendly terms with Russia and China.
Brazil has benefited from being a neutral supplier for commodities. It saw an export boom in 2023, which is leading to an improved fiscal position. It is one of a number of countries that would also benefit from de-dollarisation, with the ability to trade in a range of currencies allowing it to grow faster.
Investment options
It is not always easy to play these macroeconomic trends in a portfolio.
However, GQG Partners’ Emerging Markets Equity fund has high weightings in India and Brazil (31 per cent and 24 per cent respectively) and could be a beneficiary.
Although the Indian market has been strong, a dedicated India fund may also have a place as a ‘satellite’ option in a portfolio. We like the Goldman Sachs India Equity Portfolio.
Another option could be an emerging market debt fund, such as the M&G Emerging Markets Bond fund.
Emerging market bonds would benefit if countries’ fiscal positions improved and local currencies appreciated. The fund also has an attractive yield, at 6.4 per cent.
Investment markets adjust slowly to major geopolitical shifts.
However, investors need to be alert to these long-term changes in the global world order. They could have a meaningful long-term impact on the relative performance of individual countries.
Darius McDermott is the managing director at Chelsea Financial Services and FundCalibre
