Wednesday, July 14, 2010

Beyond BRICS: the CIVETS

From Money Morning (Australia):

[Editor's Note: Money Morning's Martin Hutchinson, a noted commentator, author and longtime international merchant banker, tells us which countries figure to be the "next" hot emerging-market economies. His recommendations may surprise you.
First it was the "BRICs." Now it's the "CIVETS."

In fact, the CIVETS are the "new" BRICs: Expect some of the CIVETS economies (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) to be among the world's hottest markets in the decade to come. They have the potential to generate the same kind of windfall wealth as the BRIC markets of Brazil, Russia, India and China did over the last 10 years - but only if you pick the right markets at the right time.

So let's figure that out right now.

The Birth (and Rebirth) of 'The BRICS'

It's been almost a decade - 2001, to be exact - since Goldman Sachs Group Inc. (NYSE: GS) economist Jim O'Neill conceived the "BRICS" acronym as a marketing vehicle that would convey the exciting investment potential of four key emerging markets (Brazil, Russia, India and China).

O'Neill is back - with a new list and a new acronym: The "CIVETS." Given how much money investors have made from the BRICs, that suggests the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) deserve a closer look. Potentially, they may be the great growth markets of the new decade - or not!

O'Neill's thesis is that growth is now spreading beyond the BRICs, whose stock markets have been pretty heavily explored at least by institutional investors, and that the CIVETS economies are the next chunky economies where growth seems likely and there is money to be made. Personally, I would buy Chile before any of them. But I suppose O'Neill would complain that the Chilean market was not big enough for the titanic wealth of Goldman Sachs!

The CIVETS Magical Mystery Tour

So allow me to lead us on a tour of the CIVETS markets, during which I will actually rate the profit potential (in standard Wall Street style), and will even expose any pitfalls that could render that potential moot.

Our CIVETS tour begins with Colombia, which looks like an excellent candidate for future growth. In fact, I said as much to Money Morning readers just last month, mere days after the voters confirmed center-right candidate Juan Manuel Santos (whose resume includes degrees from Harvard, the Fletcher School of Law and Diplomacy and the London School of Economics) as its new president. With 44 million people and a gross domestic product (GDP) of $231 billion, Colombia is certainly big enough to be worth considering. In a world in which resources prices are likely to trend upwards because of Chinese and Indian demand, I like the country's agricultural and natural-resources orientation. What's more, should the U.S. Congress ever actually ratify the U.S.-Colombia Free Trade Agreement (signed all the way back in November 2006), there should be a further boost to the Columbian market. The Economist's panel of forecasters projects growth of 2.5% this year and 3.8% in 2011. But that looks much too low to me. The projected 2010 budget deficit equal to 3.9% of GDP and the payments deficit of 1.6% of GDP look reasonable, as does the 2.6% inflation rate. The market's Price/Earnings (P/E) ratio is 19.5, which is a little high. But when you sum it all up, Colombia is a "BUY."

Indonesia is another country I have liked for a long time, particularly under its current, competent government of Susilo Bambang Yudhoyono, in power since 2004. With 243 million people and a GDP of $521 billion, it's a substantive-enough economy to invest in. It's well diversified, with agriculture, natural resources and substantial manufacturing. The level of corruption in the society is too high to be comfortable, but it remains lower than Russia. And it's strategically situated between China and India, meaning it should benefit as both those behemoths grow. The Economist is pretty optimistic about growth, with forecasters calling for a 5.6% advance this year and 5.9% next year. The budget deficit is a reasonable 2.1% of GDP, and the current account is in surplus. With a P/E of 18, Indonesia's stock market - like the aforementioned Colombia - is a bit pricey. Even so, Indonesia is definitely a "BUY.">>>MORE