BRICs or FAANGs: Convenient acronyms don't spell safe investment bets

A 24-hour earnings blitz from Facebook-owner Meta and Amazon this month showed just why market acronyms like "FAANGs" capture a changing world for a bit but rarely endure as long-term investment concepts.

From dot.com bubble era "TMT" bundles of then diverse telecom, media and technology stocks to the "BRICs" of Brazil, Russia, India and China that captured shifting economic power in the 2000s, investors are suckers for catchy acronyms.

And they're mostly a gift for, if not an invention of, investment marketing teams.

Convenient collections hinge on themes and share traits for a period. But mostly it's timing, zeitgeist and a bull market.

The FAANGs group of tech and internet giants Facebook, Amazon, Apple, Netflix and Google owner Alphabet has been the vanguard of the so-called fourth industrial revolution for over a decade. Their success made them investment darlings and then their vast combined market capitalization has been self-feeding as passive investors flock there too.

But cracks eventually appear.

Meta's fourth quarter results on Feb. 2 saw its stock market value plunge by $230 billion, the biggest one-day market cap loss in U.S. history. The next day, Amazon published earnings and its market value leapt $190 billion, the biggest ever rise in U.S. history.

Not only could that $420 billion divergence buy you a Pepsi and a McDonald's - the companies - it was a reminder that each component of these acronyms has unique characteristics and dynamics that demand they be taken on their own merits.

Jim O'Neill, who coined the "BRIC" acronym in 2001 when he was chief economist at Goldman Sachs, stresses that the concept was - and still is - aimed at shining a light on the "changing state of the world economy and need for change in global governance".

It never was an intended investment thematic idea.

"How it became a popular investment concept was somewhat odd, and reflects how many ideas become thematic investment ideas. But as repeated evidence through time suggests, investing is a tricky business and requires careful thinking about each market and asset," O'Neill reflects.

Building BRICs

In the early 2000s the BRICs were booming, their exports and share of world trade were rising, and capital was flooding in.

It was the golden age of globalization, BRICs captured the times, and investors wanted a piece of it.

In the decade after O'Neill first used the term, MSCI's "BRIC" equity index rose almost 300% in dollar terms, beating the MSCI emerging index's 215% and smashing the S&P 500's 9% rise.

But then things soured. Russia's economy went into a two-year tailspin in 2014 and Brazil plunged into recession in 2015-16. Investors withdrew their capital, and the intra-BRICs divergence widened.

In the last decade, the MSCI "BRIC" index has risen 5% in dollar terms, virtually a rounding error in the S&P 500's 232% rise. Russia and Brazil are down 9% and 41%, respectively.

When a rising tide lifts all boats, divergence within the basket is not a problem. But when 50% of the basket is in trouble and exchange rates are tumbling, it is.

In the same vein, "FAANG" stocks may also be losing their mojo after a period of seemingly untouchable success. Since CNBC host and investor Jim Cramer first coined the term in 2013, they have gained over 800%, more than double the Nasdaq and around four times the S&P 500.

Outperformance has been strongest post-pandemic, a fertile period for tech: negative real interest rates, low inflation, and a trampoline-like bounce in economic activity.

MAAMA MIA

But U.S. growth is now slowing, inflation is at a 40-year high, and the Fed is about to jack up interest rates. That's a challenging enough backdrop for the FAANGs collectively, and as the Facebook and Amazon fourth quarter earnings showed, each component is meeting it differently.

As Schroders investment strategist Karim El Nokali says, these stocks should trade more on their underlying fundamentals than thematic momentum.

"The easy money in that trade has been made. Volatility is the name of the game now. If you are more narrowly invested, you are more exposed," he said.

He might be right. The FAANGs index is down 9% this year, narrowly outperforming the Nasdaq. But within that Apple is down only 2.7% while Facebook and Netflix have each lost a third of their market value.

Maybe it is time to rejig the acronym. Late last year, Cramer suggested "MAAMA", replacing Netflix with Microsoft and using the Facebook and Google parent company names.

One for Wall Street's sales teams to start marketing? 

(The opinions expressed here are those of the author, a columnist for Reuters.)

(By Jamie McGeever; Editing by Sam Holmes)