Market Overview

The CIVETS: Windfall Wealth From the ‘New’ BRIC Economies

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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.”

Vietnam is hailed as the next China. And with good reason: Vietnam has a culture that’s similar to the Red Dragon, it’s an ex-Communist, one-party state, and attracts foreign investment because of its cheap labor costs. Vietnam has a population of 90 million, but a GDP of only $92.4 billion. The problem here is that the old East Asian route to riches of cheap manufacturing is pre-empted by the behemoths China and India, so Vietnam may find it much more difficult to succeed than its East Asian predecessors did during the half-century that spanned 1950-2000. The Economist is optimistic about Vietnam’s growth prospects, predicting a 6.2% advance in 2010 and 7.0% in 2011. But the budget deficit is substantial at 7.7% of GDP, as is the payments deficit at 7.8% of GDP. Also highly worrisome: The inflation rate is expected to exceed 10%. Given that the stock market is small and highly speculative, and it’s very difficult for a U.S. investor to buy directly, I wouldn’t rush in too fast here. Still, keep an eye on this market: Vietnam is currently a “HOLD/BUY.”

Egypt makes the CIVETS acronym work nicely, but I can't see why you would regard it as a growth economy. What's more, it is essentially a one-party dictatorship in which the dictator – Hosni Mubarak – is 82. With 80 million people and a GDP of $190 billion, Egypt is surprisingly poor – especially given its geographical location close to Europe. The Economist expects this country to grow at 5.2% in 2010 and 5.4% in 2011 (but with population growth of a full 2% annually, that’s less impressive than it looks). The economy is heavily government controlled, and has few natural resources, given its excessive population. With a budget deficit of 8.7% of GDP, a payments deficit of 3.7% of GDP, an expected inflation rate of 12%, and an 82-year-old dictator, this market just doesn’t look attractive to me. Thus, I must say that Egypt is currently an “AVOID.”

Turkey is a pretty decent growth economy, albeit without many natural resources. But it now faces significant political risk. With 78 million people and a $608 billion economy, Turkey is (economically speaking) the largest of the CIVETS. In office since 2002, the current government of Recep Erdogan has done a good job on the economy. The Economist’s forecasters say Turkey will grow at a 4.8% clip this year and another 4.0% in 2011. But that looks low – especially given that first-quarter growth ran at an annual rate of 11.7%. The budget deficit is 4.5% of GDP, the trade deficit 4.8% of GDP and inflation is expected to run at 10.1% in 2010. Also a concern: The public debt/GDP ratio – while well below its 2002 levels – is at 46%.  Turkey has two possible paths down which it may travel, but they represent very different outcomes to investors: One is an opportunity, the other a danger. The opportunity is that Turkey finally gets a really decent free trade agreement with the European Union (EU) – without full membership – that allows it to manufacture for tariff-free sale throughout the EU market. The danger is that Erdogan reorients Turkish foreign policy towards the economic deadbeats of the Middle East. That makes Turkey a high-risk proposition. But the Turkish market’s P/E is only 11. It’s speculative, but on the whole I have to say that Turkey is a risky “BUY.”

South Africa is another resource-rich economy, which I believe to be a better basis than cheap labor for market emergence in the 2010s. With 49 million people, a barely growing population, and a GDP of $280 billion, South Africa is a decent-sized economy. However, Economist forecasters have it growing at a rate of only 2.8% in 2010 and 3.7% in 2011. With a budget deficit of 6.3% of GDP, and a payments deficit of 5.0%, this country’s finances are unattractive – even with the fact that The Economist expects inflation to run only at a tolerable 5.8%. The problem is management: The post-1994 South African governments have not shown they can run the economy well, in spite of South Africa’s resource advantages. What's more, the Gini coefficient of inequality is 65 – the world’s second highest – which makes the society highly unstable.  The market’s not cheap, either, given its P/E of 16. You may want to dabble in a gold mine or two, but even there the risks are less in places like Canada and the better bits of Latin America. For me, South Africa is too risky – and is a "HOLD," at best.

All the BRICs would have made investors good money in the 2001-2010 time frame. Even so, I would have invested neither in Russia under Vladimir Putin, nor in Brazil until about 2006: The risks in both places were too high for the rewards. But I would have invested modestly in China as far back as 2001. And I did invest – very profitably – in India.

Like the BRICs, the CIVETS don’t offer a sure-fire recipe for investment profits. All the same, I think we’d be foolish not to look at possibilities in Colombia and Indonesia, and perhaps even Turkey, for now. And don’t forget about Vietnam, which will be very interesting when it opens further.

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About the Editor: A longtime international merchant banker, Hutchinson has a nose for profits instincts - as evidenced by his unerring ability to paint a picture of what's to come. With his "Alpha Bulldog" investing strategy - the crux of his Permanent Wealth Investor advisory service - Hutchinson puts those global-investing instincts to good use. He's managed to combine dividends, gold and growth into a winning, but low-risk formula that has developed eye-popping returns for subscribers.

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