emerging markets: CIVETS and BRICS (wsj)

Monday, September 19, 2011

The Wall Street Journal Wealth Adviser



By JOHN GREENWOOD

Ten years after Brazil, Russia, India and China were dubbed the BRICs, any early mover advantage for investing in those economies has long gone.

.But lovers of acronyms will be relieved to learn the latest investment theme claiming to steal a march on emerging markets also has a catchy name: CIVETS.

The so-called CIVETS group of countries—Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa—are being touted as the next generation of tiger economies, even if they are named after a more shy and retiring feline mammal.

These nations all have large, young populations with an average age of 27. This, or so the theory goes, means these countries will benefit from fast-rising domestic consumption. They also are all fast-growing, relatively diverse economies, meaning they shouldn't be as heavily dependent on external demand as the BRICs.

HSBC Global Asset Management launched the first fund specifically targeting these countries, the HSBC GIF CIVETS fund, in May. HSBC points to rising levels of foreign direct investment across the grouping, low levels of public debt—except for Turkey—and sovereign credit ratings moving toward investment grade.

Critics say CIVETS countries have nothing in common beyond their youthful populations. Furthermore, they say, liquidity and corporate governance are patchy and political risk remains a factor, particularly in Egypt.

"This sounds like a gimmick to me," says Darius McDermott, managing director at Chelsea Financial Services. "What does Egypt have in common with Vietnam? At least the BRIC countries were the four biggest emerging economies, so there was some rationale for grouping them together. A general emerging-markets fund would be a less risky way to get similar exposure."

Still, early numbers suggest that CIVETS investors could prosper. The S&P CIVETS 60 index, established in 2007, is ahead of two other emerging-markets indexes—the S&P BRIC 40 and S&P Emerging BMI—over one and three years.

Colombia: Colombia is emerging as an attractive destination for investors. Improved security measures have led to a 90% decline in kidnappings and a 46% drop in the murder rate over the past decade, which has helped per-capita gross domestic product double since 2002. Colombia's sovereign debt was promoted to investment grade by all three ratings agencies this year.

Colombia has substantial oil, coal and natural-gas deposits. Foreign direct investment totaled $6.8 billion in 2010, with the U.S. its principal partner.

HSBC Global Asset Management likes Bancolombia SA, the country's largest private bank, which has posted a return on equity of more than 19% for each of the last eight years.

Indonesia: The world's fourth-most populous nation, Indonesia weathered the global financial crisis better than most, helped by its massive domestic consumption market. After growing 4.5% in 2009, it rebounded above the 6% mark last year and is predicted to stay there for the next few years. Its sovereign debt rating has risen to one notch below investment grade in the last year.

Although Indonesia has the lowest unit labor costs in the Asia-Pacific region and a government ambitious to make the nation a manufacturing hub, corruption is a problem.

Some fund managers see exposure best achieved through local subsidiaries of multinationals. Andy Brown, investment manager at Aberdeen Asset Management, holds PT Astra International, an auto conglomerate that is majority-owned by Jardine Matheson Group.

Vietnam: Vietnam has been one of the fastest-growing economies in the world for the past 20 years, with the World Bank projecting 6% growth this year rising to 7.2% in 2013. Its proximity to China has led some analysts to describe it as a potential new manufacturing hub.

But communist Vietnam only became a member of the World Trade Organization in 2007. "The reality is that investing in Vietnam is still a very laborious process," Mr. Brown says.

Cynics suggest Vietnam is included within the CIVETS to make the acronym work. The HSBC fund has only a 1.5% target allocation to the country.

Egypt: Revolution may have put the brakes on the Egyptian economy—the World Bank is predicting growth of just 1% this year, compared with 5.2% last year—but analysts expect it to regain its growth trajectory when political stability returns.

Egypt's many assets include fast-growing ports on the Mediterranean and Red Sea linked by the Suez Canal and its vast untapped natural-gas resources.

Egypt has a big, young population—82 million strong and with a median age of 25. Aberdeen says National Société Générale Bank (NSGB), a subsidiary of Société Générale SA, is well-positioned to take advantage of Egypt's underdeveloped domestic consumption.

Turkey: Located between Europe and major energy producers in the Middle East, Caspian Sea and Russia, Turkey has major natural-gas pipeline projects that make it an important energy corridor between Europe and Central Asia.

"Turkey is a dynamic economy that has trading links with the European Union but without the constraints of the euro-zone or EU membership," says Phil Poole of HSBC Global Asset Management.

The World Bank is predicting growth of 6.1% this year, falling back to 5.3% in 2013.

Mr. Poole rates national air carrier Türk Hava Yollari as a good investment, while Mr. Brown prefers fast-growing retailer BIM Birlesik Magazalar A.S. and Anadolu Group, which owns brewer Efes Beer Group.

South Africa: Rising commodity prices, renewed demand in its automotive and chemical industries and spending on the World Cup have helped South Africa—a diversified economy rich in resources such as gold and platinum—resume growth after it slipped into recession during the global economic downturn.

Many see the nation as a gateway to investment into the rest of Africa.

HSBC sees long-term growth potential in mining, energy and chemical firm Sasol Ltd.

Mr. Greenwood is a personal-finance writer in London. He can be reached at reports@wsj.com.

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