Are the second tier emerging markets worth investing in?
To aficionados, civet coffee is the finest coffee there is. It's certainly the most expensive, selling for £200 per pound. It is made from coffee beans that have been partially digested and excreted by Sumatran civets, which apparently accounts for its rich chocolate flavour. Personally I'd rather get my chocolate from Cadbury.
Proponents of the CIVETS group of emerging markets -- Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa – liken those countries' wealth generation to that of the coffee bean guzzling civets: cheap local resource in, expensive global product out. But opinion is as divided as appetite for the coffee. To its critics, it's just a random grouping of countries dreamed up as a marketing ploy by the asset management industry.
Pedigree
And it's true the acronym was popularised by Michael Geoghan, former CEO of HSBC (LSE: HSBA) which then conveniently launched a CIVETS investment fund. But the term has a better pedigree, having been coined originally by Robert Ward, head of global forecasting at the Economist Intelligence Unit.
The CIVETS are claimed to share similar characteristics that drive economic growth. And that makes them worth studying, even if the idea of investing in them collectively doesn't stack up.
I'm on a mission to explore new territories as part of my investment objectives this year. I'm avoiding Europe (where the dogs are called PIGS) and looking for economies that can sustain high rates of growth. But I'm wary of blanket investment, such as through ETFs, and am keener on finding good companies that can build solid market positions, such as Lonrho (LSE: LONR) in Africa.
Attributes
So the CIVETS concept is useful as a starting point for exploration. These are the attributes that the constituents are claimed to share:
- Rapid economic growth;
- Large, young and reasonably well-educated populations with an average age around 27-28 (compared to 40 for the UK and US);
- Diversified economies not overly dependent on any one sector;
- A varied export base;
- Relatively sophisticated financial sectors;
- Relative political stability;
- Mostly, moderate inflation, low public and household debt and a decent balance of trade.
As a consequence they have also seen increasing foreign direct investment.
The Countries
Though Colombia retains the dubious accolade of being the world's largest producer of cocaine, the government has done much to bring the drug cartels and paramilitary groups under control. Together with business friendly policies this has stimulated foreign investment, especially in development of the oil industry, in contrast to neighbouring Venezuela. It is the third largest exporter of oil to the US, and has used its external revenues to invest in its poor infrastructure.
The country has attained investment grade status, but GDP growth is only around 4%-5%.
Indonesia's 245 million people make it the fourth most populous nation in the world. It has a vast pool of educated manpower, with almost half the economy industrial, and has the lowest unit labour costs in the Asia-Pacific region. Average manufacturing wages are under a tenth those in China. This gives credence to the government's aim to make it a regional manufacturing hub. Together with a large domestic market, the economy is set to maintain its 6% pa GDP growth.
Vietnam has similar manufacturing capabilities, adjacent to the vast Chinese economy, and is projected to grow at 6%-7% a year. Manufacturing has grown to comprise over 40% of the economy. It has a surprisingly large population of 88m, but less a less favourable investment climate has led to it being eclipsed by Indonesia.
Egypt's economy has suffered from the recent unrest, with growth of around 1% in 2011 compared to 5.1% in 2010, but it is expected to bounce back this year.
Its strategic location, with Mediterranean and Red Sea ports joined by the Suez Canal, places it as a potential trade hub between Europe and Africa. It has two large untapped resources: natural gas, and a population of 82 million people with a median age of 25.
Turkey's ambition to join the EU has been sidelined by the eurozone crisis, but its strategic position between the continents of Europe and Asia, providing an energy corridor to Central Asian oil and gas fields, should ensure the west continues to court it. Over half of Turkey's exports go to Europe, but the government is encouraging Middle East trade as a hedge against Europe's economic instability.
Relatively developed with a population of 74 million and with a large services sector, Turkey is growing at over 6% a year and has a well developed banking system.
South Africa is the most developed country in Africa but its growth compares poorly with the other CIVETS at around 3% pa. It has a young population with a median age of 25, but unemployment is high (around 25%) and education more problematic. Natural resources underpin the economy.
So these are in reality seven very different countries, though with some attractive features in common. There is no logic to invest in them as a group, but some merit closer review. I'm especially interested in the potential of Indonesia and Turkey, both populous educated nations on the periphery of large economies. That's where I'll explore first.
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Tony has shares in HSBC and Lonrho.
