The BRICs are out-of-style. Brazil, Russia, India and China are already yesterday's investing theme. And as it becomes increasingly apparent that the United States and Europe will be growth-constrained in the near future, investors are now checking out a new bloc of emerging economies called the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa).
Growth in these countries has started to catch the attention of globally-focused money managers and, conveniently, there is an exchange-traded fund (ETF) focusing on each country that allows individual investors to own a piece. The question is, are these countries suitable for your portfolio?
Over the years, I have had the good fortune to travel extensively and have brought back a few investing perspectives from my trips to Colombia, Indonesia, Vietnam, Egypt and Turkey (I've never been to South Africa). And after consulting with Nathan Slaughter, our resident ETF expert at StreetAuthority, here are my cursory thoughts:
Vietnam -- I was extremely impressed by this country during my visit in 2007. It is blessed with a low-cost but hard-working labor force, an increasingly strong transportation infrastructure, a domestic population of 88 million (larger than any country in Europe) ripe for a burgeoning middle class, and fairly impressive offshore oil and gas deposits. In fact, on that trip, I found Vietnam to be organized and efficient compared to my trip to the seeming hurly-burly of China, which seemed to be choking on growth at every turn. At the time of my trip, Intel (Nasdaq: INTC) and other tech firms were starting to build large factories to tap into Vietnam's' labor pool.
Three years after my trip, Vietnam has unfortunately been beset by a range of problems, most notably stubbornly high inflation of 9%, trade deficits, an 8% government budget deficit and a government that seems ill-equipped to handle the transition from communism to capitalism. On this front, Chinese planners now look far savvier. Vietnam has been forced to devalue its currency in the face of its trade and inflation problems.
Yet Vietnam's future is quite bright once it tackles these problems. Tourism revenue is surging and Vietnam could easily catch up to Thailand as the go-to destination for Southeast Asia beachgoers. Secondly, wages in China are starting to rise, and Vietnam is steadily taking its share of new Western manufacturing plants. Finally, a middle class is really starting to emerge, especially as ex-nationals residing in North America and France return with plenty of money to invest.
The Market Vectors Vietnam ETF (NYSE: VNM) hovers near a 52-week low, due to the reasons noted above. But a stumble should have been expected. After all, Vietnam's economy had seen a remarkable run during the past decade that helped fuel a +400% jump in per capita disposable income. The current growing pains are solvable, and I am firm believer that Vietnam's prospects remain very bright and this ETF will stage a robust rebound after the current negative economic issues have passed.
Egypt -- In the spirit of diplomacy, I will simply say that Egypt faces major challenges, most notably a very poor infrastructure and a fast-growing yet under-employed population, the majority of which is under 25 years old. It's hard to see how Egypt can generate high rates of job growth that will bring down its high unemployment rate, especially with the government's track record of ineffectual policies. My experience in Cairo revealed a city that was cratering under the weight of a groaning population.
Egypt will have new leadership in the next year. If it is a crony or the son of current President Hosni Mubarak, then the situation is unlikely to change. But if Mohammed El-Baradai, the well-regarded nuclear arms inspector, is elected (which is admittedly a long-shot), then sound government practices may get put into place. The Market Vectors Egypt EGPT) would ultimately be the way to play such a turnaround, but it is too thinly-traded for most investors to consider it at this time.(Nasdaq:
Indonesia -- First of all, it's hard to ignore Indonesia's size (243 million). The government has apparently been effective in finally tackling corruption and nepotism and the economy is growing at a strong pace. But I have little first-hand insight into Indonesia's prospects, so I turned to Nathan Slaughter, editor of StreetAuthority's Market Advisor newsletter, for insight. Nathan has been following developments in this country for some time now, and is quite bullish about its prospects.
Here's what he told his Market Advisor subscribers in May:
"...some of the biggest beneficiaries of China's juggernaut economy are found well outside the country's borders. Many smaller neighbors in the Association of Southeast Asian Nations (ASEAN) are being pulled into China's orbit. With the landmark ASEAN-China Free Trade Agreement taking effect this past January, it's now easier than ever for foreign producers to get their products in the hands of Chinese consumers and businesses."
The Market Vectors Indonesia ETF (NYSE: IDX) has had a strong run and hovers near an all-time high. (Nathan has also identified a closed-end fund that he highly recommends. Go here to learn more about Nathan's picks.)
Turkey -- My 2009 visit to Istanbul, Turkey left me very impressed. I was not expecting to find such a highly-developed economy, highlighted by very strong banking, tourism and manufacturing sectors. Turkey has established itself as a global trading powerhouse in the past two decades, and concerns that a new government that is less pliable to Western interests would hurt economic prospects are unfounded. Turkey's religious class is feuding with its secular class, and some are concerned that it could spiral into a more aggressive internal dispute -- always a bad thing for stock markets. But that possibility still appears remote.
Turkey is possibly the most advantageously-situated country in the world, just steps away from Southern Europe, central Asia, Russia and the Middle East. As a result, the country is boosting trade in virtually every direction. Turkey's industrial output is up +15% from a year ago. Few countries in the world can say that right now. As Turkey's trading partners get back on their feet, Turkey's low-cost but very efficient industrial sector could emerge as the backbone of the region, much as German factories export across Europe.
The iShares Trust MSCI Turkey ETF (NYSE: TUR) is up more than +15% year-to-date, but in the context of the country's long-term growth prospects, that advance should mean little to investors. Equally important, Turkey's economy and stock market are increasingly de-coupled from the West, so any hiccups in the United States and Europe aren't likely to be felt as severely with this ETF.
Colombia -- I've saved the best for last. After numerous trips to Argentina and Chile over the years, I had been led to believe that Colombia was a relative backwater. Instead, I found Bogota, the capital city, to be remarkably dynamic, the national infrastructure outside of the major cities to be very well-developed, and most importantly, the country's large middle class to be very savvy. Colombia is also sitting on a vast set of natural resources and is becoming an export powerhouse in everything from cut flowers to oil to gold.
But the secret is out. The country's stock market has tripled during the past 18 months. Much of that gain is due to an ongoing peace GXG) ETF depends on your time horizon. The index appears ripe for profit-taking, and investors may still be spooked by another round of violence between the government and guerillas. But over the long-term, it's hard to understate just how many strengths this country has. I'm very bullish on Latin America more broadly, thanks to rising incomes in Brazil, Chile and elsewhere. Colombia can count on robust trade flows with those countries well into the future.that has come from the sharp reduction in violence. So whether you should buy into the Global X/InterBolsa FTSE Columbia (NYSE:
Action to Take --> Gone are the days when these countries were characterized by high inflation, non-transparent stock markets and inept governments. Colombia is blessed with vast resources and a dynamic middle class, Turkey is poised to be the trading partner to the world, and Vietnam can count on very low labor costs and rising tourism and manufacturing sectors. All three of these countries are very appealing, and look like true buy-and-hold opportunities.