Beyond BRICs: New investment hotspots

The BRIC economies have paid out handsomely, but where will you find the next global opportunities? Simon Read asks the experts

Emerging markets have long proved to be a decent punt for investors happy to take a risk with some of their portfolio. In recent times, that's meant putting money into Brazil, Russia, India and China, the so-called Bric economies. But as these regions have re-emerged into becoming major economies, their prospects for growth have slowed. For investors looking for greater potential, that means casting the net wider. But which countries are likely to yield decent returns in the next decade?

Mark Mobius, chairman of Templeton Emerging Markets Group, favours Africa. The emerging-markets guru has often been ahead of the trend, so will he be right? "The continent does have its detractors, who say that while it may have been free of colonial rule for 60 years, it continues to battle poverty, corruption, Aids and armed conflict," Mr Mobius says. "However, while Africa does have challenges, I am encouraged by another side of it that is gradually emerging – the development of capital markets, consumerism and technology."

In particular he highlights Nigeria, Ghana and Kenya as countries with potential. Nigeria has a population of about 155 million, and it is rich in oil and gas reserves and raw materials such as iron ore, coal and bauxite. In addition, its climate and large areas of fertile land lend themselves favourably to agriculture. "The government's recent bailout of banks has made the nation's bank stocks cheap, creating some very interesting investment opportunities," Mr Mobius says.

Ghana is seen by many as one of the most politically stable democracies in sub-Saharan Africa. "I am excited about the prospects for consumer-related sectors in this market, given its relatively young and dynamic population of more than 20 million," Mr Mobius says. The country is also rich in natural resources such as oil and gold.

He says the Kenyan economy appears to be doing well at the moment. "The post-election violence in late 2007 and early 2008 took many by surprise, but it culminated in the establishment of a coalition government and the adoption of a new constitution in 2010, creating a solid foundation for future stability and growth. Kenya's position on the east coast of Africa allows it to act as a hub for trade and investment flows from the East into the rest of the continent."

Elsewhere in the world, Mr Mobius picks Mexico, which he says "has a wonderful combination of a dynamic economy with an active cultural scene". His enthusiasm is echoed by Alex Duffy, co-portfolio manager of Fidelity's Latin America fund. He points out that the Mexican economic performance tends to be quite well correlated with that of the US, largely due to its dominance as a manufacturing hub for its neighbour.

"Five years ago, the labour cost of a Mexican worker was 260 per cent more expensive than a Chinese worker," Mr Duffy says. "That premium has steadily eroded over time and after a lull in the early part of this century, Mexican goods are once again taking an increasingly larger percentage of imports into the US. We have a fairly positive outlook on the US recovery, so Mexico stands to benefit as a result."

Mr Duffy's other pick as a potential investment hot spot is Colombia. "It is rated as the most business-friendly Latin American country by the World Bank and after several delays is due to sign a free-trade agreement with the US in the coming year," he says. "Safety and security is less of an issue now as the government seems to be winning its battle against crime and its expected economic growth rates and demographics in the coming years are among the best in the whole region."

Abhijit Sarkar, co-manager of the BNY Mellon Vietnam, India and China Fund, suggests Vietnam has potential. "The biggest challenge facing the Vietnamese economy is in restoring faith in its currency and making the cost of capital competitive," he says. "Nevertheless, the opportunities for investment are hard to ignore."

He points out its young population with a predisposition towards consumption, as well as its relatively stable political dispensation. "As an emerging market, Vietnam is still grappling with currency issues but even though the Vietnam dong has been devalued over 10 per cent on a one-year basis, the depreciation actually makes Vietnam more export-competitive."

Keeping in the same part of the world, Gillian Kwek, who manages the Fidelity Asean Fund, suggests the Philippines and Thailand. "A new Philippine government that is widely viewed to be progressive and clean was elected in 2010 and many corporates are excited about growth over the next few years. The Philippines had not seen much investment over the past 20 years and if the infrastructure reforms work well, then sustainable growth rate can be increased to perhaps 6-7 per cent."

Talking about Thailand, Ms Kwek says the economy is well supported by the resilient domestic consumption. "Thailand has an attractive demographic profile – a large young population will add to the country's workforce and consumers in the coming years. Thailand is also a large exporter of food commodities, which are less vulnerable to a global economic slowdown. Additional positives included potential currency appreciation, robust domestic consumption, good credit growth, all of which lead to upward earnings revisions."

When thinking about emerging markets, Europe is less to the fore, but Stephen Barber, who advises Selftrade on markets and economics, thinks Turkey has potential. "Bric has been one of the most exciting and prominent groupings, but it does not end there. I favour Turkey as an economy with one foot in Europe and the other in Asia. It offers a gateway to the East and exposure to some of the fast-growing economies, but with much lower volatility," Mr Barber says. "With the advantage of democracy and the rule of law as well as the ambition to join the EU, this market offers investors a greater degree of stability than some of these other countries while maintaining the attractions of an emerging economy."

'Brazil, Russia, India and China still offer growth'

* The BRICs investment concept began almost a decade ago when Jim O'Neill of Goldman Sachs came up with the idea of throwing together the large and fast-growing economies of Brazil, Russia, India and China into one investable block. All four countries had size in common; very big populations (more than 40 per cent of the global total) and very big land masses (more than 25 per cent of the global total), which in turn supported big economic growth prospects. O'Neill predicted that China would overtake the US as the world's biggest economy by 2041 and, taken together, the BRIC economies would become larger than the US and the developed economies of Europe within 40 years.

The impressive economic performance of the BRICs in the last decade has seen those predictions move much closer to reality with China overtaking Japan to become the world's second largest economy last year. It means anyone investing in the BRICs 10 years ago would have made decent returns.

But there is still plenty of investment potential ahead, according to Michael Konstantinov, manager of the Allianz RCM BRIC Stars fund. "While we recognise that in 2010 the best returns were generated by smaller emerging markets, we believe that this was a temporary occurrence," says Konstantinov.

"BRIC economies continue on their superior growth path and BRIC equity markets offer the best valuations within emerging markets. I believe the recent headwinds from inflation will abate into the middle of 2011 leading to an end of monetary tightening measures," he predicts. "The growth momentum will be driven increasingly by the BRIC consumer which is becoming increasingly important within a global context."