BRIC Mania: The 2007 Emerging-Markets Craze

Key Takeaways

• BRIC, coined in a 2001 Goldman Sachs paper, named the four economies investors crowded into through 2007.
• The MSCI Emerging Markets Index roughly quadrupled from 2003 to 2007, then fell about 53% in 2008.
• Russia's market lost more than 70% in 2008 and trading was repeatedly halted.
• Fast economic growth did not deliver fast equity returns over the following decade.

Background

For most of the 1990s, emerging-market equities were a niche allocation scarred by serial crises: Mexico in 1994, Asia in 1997, Russia in 1998, and Argentina in 2001. The asset class needed a story that made the next decade look different from the last one. In 2001 it got one.

On November 30, 2001, Goldman Sachs economist Jim O'Neill published Global Economics Paper No. 66, titled "Building Better Global Economic BRICs," coining the acronym for Brazil, Russia, India, and China, according to the Library of Congress research guide and EBSCO Research Starters. O'Neill argued that the combined output of these four large emerging economies would grow faster than the G7 and rise in relative weight over the coming decade. The term gave a sprawling, diverse asset class a memorable label.

The thesis was sharpened in 2003. Goldman Sachs published Global Economics Paper No. 99, "Dreaming with BRICs: The Path to 2050," by Dominic Wilson and Roopa Purushothaman, which projected that the BRIC economies together could be larger than the G6 by around 2039, that China could overtake the United States by roughly 2041, and that India could pass Japan by about 2032. These were 40-year economic forecasts, not stock-market calls, but markets read them as a green light.

The macro backdrop made the dream plausible. The early-to-mid-2000s brought a synchronized global expansion, a commodity boom that lifted exporters like Brazil and Russia, surging Chinese demand, and a wave of foreign capital chasing growth. Into that setting, the BRIC label turned a research idea into a marketing category.

What Happened

The mania built over four years, peaked in late 2007, and unwound in 2008. The arc is visible in the index returns and the fund flows.

• 2003-2006: The MSCI Emerging Markets Index posts a string of large annual gains, gross USD total returns of about 56.3% in 2003, 26.0% in 2004, 34.5% in 2005, and 32.6% in 2006, per MSCI index data reported across financial-data sources.
• Summer 2006: Goldman Sachs and Franklin Templeton each launch dedicated BRIC mutual funds in the United States, and exchange-traded BRIC funds follow, packaging the four-country story for retail buyers.
• 2007: The MSCI EM Index returns about 39.8% for the year, its fourth straight strong year.
• Q4 2007: Emerging-market equity funds tracked by EPFR Global absorb about $22.4 billion in a single quarter, a record at the time, as reported by Reuters and Business Standard.
• October 29, 2007: The MSCI Emerging Markets Index reaches its pre-crisis peak, per MSCI factsheet data.
• July 11, 2008: Crude oil hits a record $147.27 a barrel, the high of a parallel commodity mania feeding the Brazil and Russia story.
• September 16-17, 2008: Russia's markets crash and trading is suspended on the MICEX and RTS exchanges.
• Year-end 2008: The MSCI EM Index closes the year down about 53% in USD terms.

By 2003 to 2007 the index had risen roughly fourfold, one of the strongest multi-year runs the asset class had ever produced. The "decoupling" thesis, that emerging economies and markets could keep growing even if the United States stalled, hardened into consensus as the run extended. When the global financial crisis arrived, it tested that idea directly.

The reversal was fast and global. As the US subprime crisis spread in the second half of 2008, foreign investors pulled money out of developing markets at the same time, and the asset class fell harder than the developed world it was supposed to be insulated from.

Why It Happened

The mania ran on three reinforcing forces: a clean narrative, a commodity tailwind, and a flood of crossover capital. Each amplified the others on the way up and on the way down.

The first force was the narrative itself. The BRIC label compressed a 40-year economic projection into a four-letter buy signal. Investors extrapolated long-run GDP forecasts into near-term equity expectations, a logical leap the original Goldman research never made. As O'Neill himself later acknowledged, economic growth does not always translate into higher stock-market returns, which can be eroded by corporate-governance problems, weak accounting, dilution from new share issuance, or simply paying too high a price up front.

The second force was commodities. Brazil and Russia are heavy exporters of oil, metals, and agricultural goods, so their equity markets moved with raw-material prices. The same boom that carried oil to a record $147.27 a barrel in July 2008 inflated the earnings and share prices of resource producers, per the Peterson Institute for International Economics. When commodities collapsed in the second half of 2008, the commodity-heavy BRIC markets fell hardest.

The third force was capital flows, and they proved to be the fragile link. Private capital flows to emerging economies peaked in 2007, the IMF noted in its January 2009 World Economic Outlook Update, then dropped sharply from the third quarter of 2008 as bank lending and portfolio-equity inflows reversed. Much of the run-up had been financed by foreign money chasing a theme; when global investors needed cash and cut risk, they sold the same emerging positions at the same time.

That synchronized selling is exactly what "decoupling" said could not happen. In practice, emerging-market stocks behaved as a geared version of developed-market stocks, rising faster in the boom and falling faster in the bust. The IMF projected growth in emerging and developing economies would slow from about 6.25% in 2008 to roughly 3.25% in 2009, with east Asian manufacturers and the emerging European and CIS economies hit hardest through trade and financing channels. The economies slowed, but the equity markets fell far more, the gap between an economic story and an equity outcome laid bare.

By the Numbers

• BRIC origin: Global Economics Paper No. 66, "Building Better Global Economic BRICs," published November 30, 2001 by Jim O'Neill. (Library of Congress; EBSCO; SciRP)
• 2003 projection: "Dreaming with BRICs" (Paper No. 99) projected the BRICs could exceed the G6 by around 2039 and China could pass the US by about 2041. (EBSCO; secondary reporting on the Goldman paper)
• EM run-up: MSCI Emerging Markets gross USD returns of about +56.3% (2003), +26.0% (2004), +34.5% (2005), +32.6% (2006), and +39.8% (2007), roughly a fourfold rise. (MSCI index data via financial-data sources)
• Peak: the MSCI EM Index peaked on October 29, 2007. (MSCI factsheet data)
• Record inflows: emerging-market equity funds drew about $22.4 billion in Q4 2007, a record at the time. (EPFR via Reuters / Business Standard)
• 2008 index loss: the MSCI EM Index fell about 53% in USD terms (figures cited as -53.18% and -53.33% across data sources), versus roughly -40% for developed-market world equities. (MSCI / financial-data sources)
• Peak-to-trough: the index drew down about 65% from its October 29, 2007 peak to October 27, 2008. (MSCI factsheet data)
• BRIC declines, 2008 (local currency): Russia about -72.5%, China about -66%, India about -52%, Brazil about -40%. (World Bank, Global Development Finance 2009, via reporting)
• Russia detail: the RTS Index, having peaked at 2,487.92 on May 19, 2008, fell to 1,151.16 on September 16, 2008, a 54% retreat, with trading suspended the next day. (TradingEconomics; Bloomberg)
• 2009 rebound: the MSCI EM Index rose about 78.5% in 2009 but still finished below its start-of-2008 level. (MSCI / financial-data sources)

Aftermath

The 2008 crash erased years of gains in months and humbled the decoupling thesis. Emerging-market equities fell harder than the developed markets they were supposed to be shielded from, and the commodity exporters at the center of the BRIC story were hit worst as oil collapsed from $147 to below $40 a barrel by December 2008. The IMF described a globally synchronized slump, with emerging economies contracting about 4% in the fourth quarter of 2008 in aggregate.

The asset class rebounded sharply in 2009, with the MSCI EM Index up about 78.5%, but the snapback did not validate the original euphoria, because the index still ended 2009 below where it had begun 2008. More telling was the long run. After 2010, BRIC equity returns diverged and disappointed. China's economy kept growing but its stock market lagged its GDP; Russia and Brazil stagnated as commodities cooled; only parts of the story paid off.

The clearest verdict came from the firm that coined the term. Goldman Sachs Asset Management had launched a dedicated BRIC fund in June 2006; in November 2015 it folded that fund into a broader emerging-markets vehicle after years of losses, with assets having shrunk from a peak above $800 million at the end of 2010, Bloomberg reported. The closure was widely read as the symbolic end of the BRIC investing era, even as the BRIC grouping continued as a political bloc that added South Africa in 2011 and held annual summits.

There were no headline frauds or bank failures unique to this episode, because it was a valuation-and-flows story rather than a fraud. The damage fell on investors who bought a long-run economic forecast as a short-run equity trade, and on the funds and products built to sell that forecast to them.

Lessons for Investors

1. Economic growth is not the same as equity returns. The BRIC economies did grow over the following decade, yet a dedicated BRIC fund still lost enough money to be shut down. Growth can be offset by high entry valuations, share dilution, weak governance, and currency losses. Before buying a growth story, ask what price you are paying for that growth, not just how fast the economy expands.

2. A clean narrative is a marketing tool, not a margin of safety. BRIC turned a 40-year GDP projection into a four-letter buy signal, and the simplicity is exactly what made it dangerous. The easier a thesis is to state on a fund cover, the more crowded and richly priced the trade is likely to be. Treat a slogan as a reason to check valuations, not a reason to skip them.

3. Themes that depend on foreign flows are fragile. Much of the run-up was financed by global investors chasing a theme, and capital flows that peaked in 2007 reversed hard from the third quarter of 2008. When the marginal buyer is a crossover investor who can sell to raise cash elsewhere, your market is hostage to conditions far away. Know who owns the asset and why they might leave.

4. Correlation rises exactly when you need it to fall. Decoupling promised that emerging markets would hold up if the US slowed, and instead they fell about 53% while developed markets fell about 40%. Diversification benefits tend to shrink in a crisis as everything sells off together. Stress-test a portfolio against the case where your "uncorrelated" holdings move down with everything else.

5. Commodity-linked markets carry a hidden cycle. Brazil and Russia rose with the oil and metals boom and crashed with it, their equity markets effectively a leveraged bet on raw-material prices. If a market's fortunes track a single volatile input, you own that input's cycle whether you intended to or not. Identify the real driver behind a country or sector trade before sizing it.

Frequently Asked Questions

What was the BRIC mania in simple terms? The BRIC mania was a rush of money into emerging-market stocks from 2003 to 2007, built on a Goldman Sachs label for Brazil, Russia, India, and China. Investors bought the idea that fast-growing economies would deliver fast stock-market gains, and the MSCI Emerging Markets Index roughly quadrupled before crashing in 2008.

Why did the BRIC and emerging-markets boom happen? A 2001 Goldman Sachs paper coined BRIC and a 2003 follow-up projected these economies could rival the largest Western ones by mid-century, giving the asset class a powerful story. A synchronized global expansion, a commodity boom, and a flood of foreign capital then turned that story into a self-reinforcing rally.

How much money was lost when it reversed? In 2008 the MSCI Emerging Markets Index fell about 53% in dollar terms, worse than the roughly 40% drop in developed-market world equities. Russia's market lost more than 70% in local-currency terms, and commodity-heavy markets like Brazil and Russia were hit hardest as oil collapsed from a July 2008 record near $147 a barrel.

Could a mania like this happen again today? Yes. The pattern of a memorable theme, crowded foreign flows, and extrapolated growth recurs regularly under new labels. Better data and broader access exist now, but crowd psychology and the gap between economic growth and equity returns have not gone away.

What is the main lesson from the BRIC episode? The central lesson is that a fast-growing economy does not guarantee strong stock returns. Goldman Sachs, which coined the BRIC term, eventually closed its own BRIC fund after years of losses, even though the underlying economies kept growing.

Sources

1. Library of Congress. BRICS: Sources of Information (Research Guide) - origin of the BRIC term and the 2001 O'Neill paper. https://guides.loc.gov/brics
2. EBSCO Research Starters. BRIC - Jim O'Neill, the 2001 Goldman Sachs paper, the 2003 follow-up, the first summit (2009), and South Africa joining (2011). https://www.ebsco.com/research-starters/politics-and-government/bric
3. International Monetary Fund. World Economic Outlook Update, January 2009: Global Economic Slump Challenges Policies - emerging-market growth and capital-flow reversal. https://www.imf.org/en/Publications/WEO/Issues/2016/12/31/Global-Economic-Slump-Challenges-Policies
4. TradingEconomics. Russia's Micex Index Falls Most Ever, September 16, 2008 (RTS and MICEX levels, peak, and decline). https://tradingeconomics.com/articles/09162008053601.htm
5. Peterson Institute for International Economics. The 2008 Oil Price Bubble (Mohsin S. Khan) - record $147.27 oil and collapse. https://www.piie.com/publications/policy-briefs/2008-oil-price-bubble
6. Bloomberg. Goldman's BRIC Era Ends as Fund Folds After Years of Losses, November 8, 2015 (fund launch, closure, and assets). https://www.bloomberg.com/news/articles/2015-11-08/goldman-s-bric-era-ends-as-fund-closes-after-years-of-losses
7. O'Neill, J. (2001). Building Better Global Economic BRICs. Goldman Sachs Global Economics Paper No. 66 (reference record). https://www.scirp.org/reference/referencespapers?referenceid=1214202

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.