A Gift Bag of Your Questions

Happy holidays! And whatever you celebrate this time of year, may we suggest relaxing with a winter warmer and a December mailbag full of tasty treats?

Are the BRICS the key players in Emerging Markets, and how often do Emerging Markets nations get reclassified anyway?

The BRICS moniker—Brazil, Russia, India, China and South Africa—stems from one analyst’s decision to lump the first four into an acronym representing fast-growing Emerging Markets in 2001. It was kind of an offhand thing, but it gained traction in Wall Street marketing circles and in 2009, the BRIC nations decided to have a summit. A year later, they invited South Africa and BRIC became BRICS. Then several more Emerging and Frontier economies came to play, and they stayed BRICS. “Key players” is kind of a matter of opinion, but it all grew out of one guy’s hypothesis almost 25 years ago, and he mostly laughs at how everyone made it a Thing. Which we agree with, considering they are at different stages of development, with different challenges, political systems and economic trajectories.

Which brings us to the second half of the question: Given “Emerging” implies a state of movement, how often do countries graduate? There is no set schedule, and it is actually pretty rare. The most recent graduate was Israel, way back in 2010. MSCI, which is the arbiter when it comes to market classification, makes the call based on several criteria including market access, liquidity, size, regulations and overall modernity and maturity of the country’s capital markets. Korea has been on the cusp of graduation for years, but it still has market accessibility progress to make. Lately, it is more common for countries to move from Frontier to Emerging, as Saudi Arabia, the UAE and Qatar have done in recent years.

Also note: It isn’t a one-way ticket. Greece was downgraded from Developed to Emerging during its debt crisis last decade, rendering it a submerging market (har har). Argentina has bounced back and forth between Emerging and Frontier and is currently Standalone, which is the place countries with special problems go. 

I saw the guy featured in The Big Short has some comments about an AI bubble. What are your thoughts on this or some big-name investors’ positioning for an AI crash in general?

We don’t think AI is in a late-stage bubble, which is something Fisher Investments founder and Executive Chairman Ken Fisher has written about extensively. But beyond that, we tend not to spend our time critiquing individual market calls like this whether or not we agree with them. Every forecast is an opinion, and every forecaster will be right at times and wrong at others. These also get heaps of attention, so markets tend to price them quickly.

What we find more interesting is how the general zeitgeist reacts to big-name calls like that. Are they laughed out of the building or treated reverentially? Does the consensus generally agree with them, finding wisdom in what they are saying, or string their arguments up the flagpole?

Calling AI a late-stage bubble is very, very popular right now. It doesn’t inspire mockery, and we aren’t seeing a flood of counterarguments. Mostly, it is a very conventional viewpoint. So we think the wise move now is to think about what all these folks might be overlooking, either in the AI arena or outside of it. Maybe they are wrong about AI’s immediate future. Maybe they are too focused on everything Tech and overlooking problems elsewhere. These are some of the things we are investigating and thinking through as we look toward 2026.

How do you monitor market breadth?

“Market breadth” generally refers to how broad a rally is, how many companies are participating, that sort of thing. There really isn’t an industry standard. Some outlets will use the percentage of companies rising versus falling over the trailing 12 (or 3 or 6 or whatever) months. Some will use the daily advance/decline line, which shows the net number of companies rising that day. We think it is most helpful to look at the percentage of index constituents outperforming the index itself over the last 12 months. That figure happens to be narrow right now, but we don’t think this is a timing tool—just an interesting observation consistent with a maturing bull market.

Given that Wall Street is in New York City, do you think its recent mayoral election will have a market impact?

Nope—which we say regardless of party or personality, which we are always neutral on. Rather, City Hall and markets don’t intersect. Securities regulations are set nationally, not locally. While companies may be subject to state and local taxes as well as federal, they are headquartered all over the place, rendering any municipality’s code small beans. New York politics gets headlines because so much national media is based there, so we get why people think it is important, but it is really just geographic bias.

To those who may see this as a surefire harbinger of national trends, consider: The last elected NYC mayor to win any higher office was John T. Hoffman in 1869, who went on to be New York’s governor.^[i] 1869! Ardolph Kline won a US House seat in 1920, but he was never elected mayor, serving as acting mayor for just three months in 1913. That doesn’t mean it is impossible the city’s mayor goes on to higher office, but it should cast doubt on the national meaning of the election.

How do mortgage rates in Europe compare to the US?

Apples and oranges, alas. The 30-year fixed mortgage is an American beast. Most European mortgages are fixed for their first few years only (often two or five), then floating-rate for their duration. The upshot of this is that across the pond (and in Canada and elsewhere), central bank rate hikes have more of an effect on household budgets than they do in America. That is a small variable we keep in mind when assessing economic fundamentals globally, though it often isn’t enough to tip the scales. Just an interesting factoid.