As the global economy braces for continued uncertainty amidst the COVID-19 pandemic, some companies have continued to thrive more than others. One of such companies is Nvidia, a computer chip giant that has nearly tripled in value so far this year. This incredible surge in value is driven by the role its chips play in artificial intelligence, leading some to suggest that “in AI, all roads lead to NVIDIA.”
Similarly, Alphabet, Amazon, Apple, Meta, Microsoft, and Tesla- so-called “Magnificent Seven” stocks- are all high on the list of stocks investors want to own. So, amidst a turbulent economy where growth is difficult to sustain, what makes these companies so valuable?
It’s easy to buy into the hype and ignore valuation for the sake of apparent growth. However, investors must remember that even though these stocks’ growth may seem impressive, the reality is often less splendid. A stark reminder of this is the teetering crisis in Russia, which nearly caused a civil war over the weekend. Russia was once considered among the BRICs—emerging markets including Brazil, India, and China—that were hot tickets in town, all with the promise of superior future economic growth and returns.
Yet the reputation of these former Magnificent Seven, four markets that offered future profits in the aftermath of the global financial crisis while the developed world stagnated, is far from impressive. While they saw gains of up to 90% in 2009 alone, according to MSCI’s score on these indexes, they have hardly returned more than 7% for total returns since the end of 2009. This paltry amount includes dividends before taxes and costs are taken into account or counting the effects of adjusted inflation.
As investors continue to face steep uncertainty over returns in the current economy, it’s necessary to remember past lessons that teach us that sustained financial growth usually comes from planting steady seeds, not from chasing the shiniest stock on the market.
The Perils of Investing in High Growth Markets
In November 2011, SG Securities’ contrarian strategist, Albert Edwards, raised an alarm bell on the concept of investing in the BRICs. In a note titled “Bloody Ridiculous Investment Concept,” Edwards argued that investors were blindly following what seemed like a good story.
The BRICs – Brazil, Russia, India, and China – were perceived as fast-growing economies that promised higher returns. However, Edwards cautioned against this strategy, pointing out that economic growth did not always guarantee investment returns. Investors were at risk of paying too much for stocks in high-growth markets driven by excitement rather than fundamentals.
The other danger with investing in high-growth markets is that it attracts significant investment attention, leading to competition and driving down returns. A prime example is Russia, where the investments during the boom in oil and gas prices drove up the cost of drilling. The subsequent plunge in oil and gas prices resulted in significant losses for investors.
The lesson here is not to get caught up in short-term trades or bandwagon investing, especially with your retirement funds. It’s important to stay disciplined and always be aware of the risks involved in chasing hot stocks.
The BRICs: A Cautionary Tale
The term “BRICs” was coined by economist Jim O’Neill in 2001 to describe the promising economic growth potential of Brazil, Russia, India, and China. Over the last two decades, these countries collectively grew their GDP by an average of 12% annually. Even Russia saw impressive average growth of nearly 10%.
However, despite their economic growth, investing in the BRICs has proven to be a poor choice. The political and financial turmoil in Russia has rendered its stocks virtually uninvestable, resulting in a 100% loss. Even without Russia, the newly-re-calculated BIC index (representing Brazil, India, and China) has underperformed the global stock market and emerging markets as a whole over the past 3, 5, and 10 years.
In fact, data from MSCI shows that the BRIC stock markets have been underperforming since August 2003 — less than two years after the term was first coined. By the time the BRICs became a hot investment trend in 2007 and 2010-11, it was already too late.
This serves as a cautionary tale for those seeking the next big thing on Wall Street. Economic growth does not necessarily translate to good investment opportunities, and timing is everything.