BRICS Expansion and the Shift Away from the Dollar: Implications for Investors
The recent expansion plans of the BRICS (Brazil, Russia, India, China, and South Africa) have sparked a significant shift in the global economic landscape. At their annual summit in Johannesburg, the bloc announced that it would be expanding for the first time since 2010, welcoming six new members: Saudi Arabia, Argentina, Egypt, Ethiopia, Iran, and the United Arab Emirates. This move positions the BRICS as a formidable counterbalance to the G7, elevating their share of global GDP to 36% and covering nearly half of the world’s population.
With dozens of other nations expressing interest in joining the bloc, the BRICS are clearly positioning themselves for a multipolar world that is not dominated by the US and other Western powers. One of the most significant aspects of this strategy is the BRICS’ push to conduct trade in local currencies instead of the US dollar. This move could potentially reconfigure global trade dynamics, leading to greater volatility in the Treasury market, exchange rates, inflation, and more.
Central to this strategy is the New Development Bank (NDB), established in 2015 as an alternative to Western lenders such as the World Bank and the International Monetary Fund (IMF). The NDB has been making waves in the financial world, diversifying away from the dollar by issuing Indian rupee bonds and considering local currency bonds in other countries. The bank’s President, Dilma Rousseff, shared ambitious plans to lend between $8 billion and $10 billion this year, with approximately 30% of the lending in local currencies.
While the US dollar is unlikely to be completely dethroned as the world’s primary reserve currency, it is expected to share the stage more prominently with other currencies such as the euro, Chinese yuan, Bitcoin, or others. Currently, the BRICS represent over 32% of the world’s GDP, slightly more than the G7’s 30%. However, there is still a gap in GDP per capita, an indicator of economic prosperity, that the BRICS must bridge.
As the BRICS nations evolve and expand their influence, a more diversified global governance structure is inevitable. Traditional powerhouses like the US and the European Union will need to adapt to these new realities. Investors and observers must stay nimble and understand the geopolitical, economic, and regulatory landscape to navigate this environment successfully.
In the midst of these developments, rising US Treasury yields are also shaping the market. Stronger-than-expected economic growth and the Federal Reserve’s tightening policies have led to surging yields. Risk-on assets, including stocks and Bitcoin, have felt the heat, experiencing losses. While some investors are shifting their focus towards sectors less reliant on borrowing, such as utilities and consumer staples, many remain optimistic about the resilience of equities, especially in the context of a robust US economy.
Amidst these market dynamics, gold continues to play its role as a stable store of value. Despite challenges like rising yields, investor interest in gold remains strong. Many investors are also bullish on gold mining stocks, but it is crucial to focus on high-quality, well-managed companies with strong balance sheets. Free cash flow yield is an important metric when picking gold mining stocks, as it indicates a company’s ability to generate cash relative to its market capitalization.
Leading the pack with a free cash flow yield of 15.3% is Australia-based Perseus Mining, which operates three gold mines in Africa. The company reported a strong June quarter in terms of cash generation and holds a significant amount of cash and physical gold. As the global economic landscape continues to evolve, investors must carefully navigate these opportunities and challenges, staying informed and adaptable.
In conclusion, the expansion of the BRICS bloc and their shift away from the US dollar have significant implications for investors and the global economic order. While the dollar’s status as the world’s primary reserve currency is unlikely to be completely replaced, the rise of the BRICS and their push for local currency trade signals a shift towards a more multipolar system. Investors must stay nimble and well-informed to navigate this changing environment successfully.
