After the Brics, the economies to watch will be the 'next 11'
Egypt, Turkey and Chile are among the countries whose markets are bubbling under. Julian Knight reports
Sunday 24 October 2010
Many investors when they hear the words emerging markets think of Brazil, Russia, India and China, the so-called Bric countries.
But below these mammoth states, with their rapid growth and wealth of raw materials, is another burgeoning story, that of the progress of what are called the "next 11" countries. The next 11 may not have the profile or the populations of the Bric countries, but there are still compelling reasons for investors to consider getting a slice of the action. "What's happening now is that we are seeing the theories behind Bric – whether there are the resources, people and stuff on the ground for growth – and applying this to a whole new range of countries," said Alex Tarver, the global emerging markets specialist at HSBC.
Nations seen as bubbling under about to break out include Indonesia, Mexico, South Africa, Egypt, Mexico, Chile, Argentina, Vietnam, South Korea and Turkey. "These countries are characterised by youth and urbanised populations combined with rising incomes and the expansion of the middle class," said John Kelly from independent financial advisers Chelsea Financial Services.
Here are some of the star performers from those nations bubbling under the Brics.
On the borders of Europe and waiting patiently in the anti-chamber of EU membership is Turkey, one of the most compelling growth stories not just among the emerging market countries bubbling under the Brics but also globally. "The numbers are impressive. Turkey has a population of 72 million and average age of just 28. In addition, there is a growing automotive parts sector and the banks emerged from the credit crunch relatively unscathed," Mr Tarver said. Kathryn Langridge, the manager of Jupiter Emerging Markets fund to be launched on 1 November, has some words of caution about Turkey: "Inflation at 8 per cent and a wider current account deficit suggest the need for policy tightening and the market, which has risen 35 per cent during the year to date, may react to these policy challenges." But Ms Langridge points out that the Turkish economy is growing at more than 10 per cent per year – comparable with China – and consumer demand is strong.
Africa's most important nation has seemingly been emerging into centre stage of the global economy since the end of apartheid. It has been a slow and at times painful process, with the economy growing in fits and starts. However, many managers now believe that South Africa is ready for take-off, particularly after the successful hosting of the football World Cup and the unveiling of several key infrastructure projects. "Infrastructure developments can provide excellent opportunities throughout, but the real long-term growth story that investors should be getting excited about is consumption throughout Africa. Strong and consistent GDP growth, averaging 5.3 per cent over the past decade, has seen incomes rise and a burgeoning middle class develop," said Nick Price, the manager of Fidelity Funds Emerging Europe, Middle East and Africa Fund. Although unemployment is high in South Africa, Ms Langridge sees plenty of positives. "A consumer recovery is taking place driven by stable employment and strong wage rises after drastic reductions in the workforce. Disposable spending power for those in work is rising and underpins certain consumer and financial stocks," she said. What's more, South Africa is rich in minerals and other natural resources, making it attractive to Western and increasingly Chinese investment.
A country often more associated with its past than the present is quietly emerging as an economic contender. Economic growth recovered quickly from the global downturn, and so far this year the stock market is up nearly 15 per cent compared with 11 per cent across the emerging market economies. "With a fast growing urban population, the drivers of growth in Egypt are urbanisation, housing and infrastructure," said Ms Langridge. A young population with strong trading ties throughout the Middle East is another reason for investors to think of Egypt, according to Mr Tarver. "The Middle East has been beaten up a bit and is unloved by investors, but it's a potentially strong growth area. Egypt is well based in that it trades there as well as with Africa and northwards to Europe. Don't forget, Egypt is not bereft of natural resources: it has gas, for instance, as well as the twin drivers of a growing and youthful population."
"To a large extent, South Korea has emerged rather than being an emerging economy," Mr Tarver said. Reflecting this, a fair percentage of the world's mobile telephones and cars now come from South Korea. "Korea's leading exporters, ie autos, electronics and industrials, increased their global market share due to advanced technology and healthier balance sheets," said Taewoo Kim, the manager of the Fidelity Korea Fund. It's not just South Korea's exporting prowess or its burgeoning middle class that catch the eye of investors, though. "Investing in Korea is a great way to take advantage of China's success story, as they do an increasing amount of trade, likewise with growing economies such as Indonesia," Mr Tarver added.
Now as famous for rescued miners as General Pinochet, the South American country is also making a name for itself in the world economy. "Chile has a considerably robust economy, with post-earthquake reconstruction providing an additional stimulus," Ms Langridge said.
With its fair share of natural resources and a growing population, Chile has the hallmarks of an up-and-coming economy, particularly with a relatively stable political system. But it also has some characteristics more normally associated with advanced economies. "Private consumption and investment spending underpin growth and consumer confidence is high. Inflation remains reasonable at 4 per cent, but the central bank's ability to rein back growth by raising rates is constrained by the strength of the peso. In addition, the Chilean stock market is supported by domestic institutional investors and is richly valued," Ms Langridge added.
How to invest
There are plenty of funds that exclusively invest in the Bric countries but only a small number focus solely on the smaller emerging economies. Nevertheless, HSBC's GIF Turkey fund managed by Ercan Guner has been a strong performer in 2010, while major fund groups such as Fidelity, Invesco and Shroeders offer Korean funds. Exposure to Chile, South Africa and Egypt is more easily had through a general regional fund. Another option is an exchange traded fund, some of which track the performance of national stock market at low cost. But regardless of which route chosen, Mr Kelly has a word of warning: "There is still potential political instability in many smaller emerging markets and a downturn in the world economy could hit these countries badly. Investors need to be aware of this and should limit their exposure and perhaps look at more general emerging market funds that invest in Brics and beyond."
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