How to Invest in Emerging Markets

Hit the BRICS

The BRICS are an acronym for a group of five major emerging economies, Brazil, Russia, India, China and South Africa; it was coined in 2001 and popularized by former Goldman Sachs economist Jim O’Neill.

South Africa only joined the club in 2010, but back in 2001 the quartet of Brazil, Russia, India and China were seen as thoroughbred racehorses able to give the western economies some serious competition.

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Fourteen years later and growth has fallen short of expectations. For a short stretch post 2001 things looked rosy but in the end China was the only economy to exceed expectations. “[T]he other three so far this decade have been disappointing,” says O’Neill, singling out Brazil and Russia as the weakest of the bunch.

The BRICS matter because of their combined economic might, being the four largest economies outside of the OECD (Organization for Economic Co-operation and Development).

Let’s take a look at where the BRICS are right now:

BRAZIL

Brazil is the world’s seventh-largest economy and the largest economy in South America by some distance. In 2013 Brazil’s GDP was $2.25 trillion. The continent’s next best: Argentina with $610 billion (about a quarter of Brazil’s GDP)

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RUSSIA

Vladimir Putin rules the roost in the Russia. Allegations of rampant corruption, a diminishing population courtesy of brain drain and an economy with an overdependence on the energy sector means Russia faces a number of challenges to its long-term growth. Currently the currency is in freefall due to a mix of western-imposed sanctions sparked off by the Ukraine conflict and plunging oil prices.

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 INDIA

India has the potential to become the world’s biggest economy, but faces many challenges. With income per person in India only at $1500 the country has a long way to go to catch up to the advanced economies (U.S. GDP per capita = $53,000) It has high public debt levels, poor infrastructure and faces systemic political corruption that threatens to derail any forward momentum.

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CHINA

The world’s most populous country and economic engine. Annual GDP growth has fallen from the lofty heights of 2007 but with the rest of the world slowing down, China is pulling the world behind them. Since 1949 the Chinese government has been responsible for planning and managing the national economy but it was only once more free-market principles were introduced in 1978 did the economy start to show massive growth. The transition from a closed to an open economy is still happening and may be the key to spurring continued growth in China.

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SOUTH AFRICA

The newest member of the club is hugely dependent on its mining sector. It is rich in natural resources but has an underdeveloped economy otherwise. Infrastructure is poor and post-apartheid nearly half of the black population remains mired in poverty and unemployment.

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As you can see from the charts on annual GDP growth, the BRICS haven’t performed as well as economists might have liked. The global recession hit hard, with none of the countries able to touch pre-2008 heights. China and India are the only countries to achieve growth rates greater than 5%, while the other three are in seemingly steady decline.

While the BRICS are misfiring, other economies have been gaining traction.  In 2014 Jim O’Neil popularized another group of promising emerging markets: MINT (Mexico – Indonesia – Nigeria – Turkey). The term was coined in 2011 by Fidelity Investments and they were touted as the next economic powerhouses.

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Let’s take a look at each MINT country and see if there’s any truth to that.

MEXICO

Mexico is experiencing a boom in infrastructure, and has a growing middle class that is powering their economy. It is the Latin American market investors are increasingly turning their attention to– drawing a record $35 billion in foreign direct investment in 2013, nearly double that of 2012. President Pena Nieto is the man behind a series of economic reforms, ranging from telecoms to energy, all aimed at luring investors to Mexico.

INDONESIA

Indonesia is projected to become the seventh-largest economy in the world by 2050, moving up 9 spots from its current 16th place position. It is the fourth most populous country in the world, and has made a successful transition from military dictatorship to democracy. The country has some hurdles to jump; debt has risen while the currency has fallen in value – prompting foreign investors to pull money out of the country. The weakness of Indonesia lies in its susceptibility to sudden outflows of foreign capital.

NIGERIA

Nigeria is currently in an economic sweet spot. They are diversifying their economy, rapidly growing their financial, service, communications and entertainment sectors and attracting attention from investors the world over. Nigeria is also the largest oil producer in Africa, and the world’s eighth-largest exporter of crude oil. There are considerable challenges but Nigeria is a high population economy with growing wealth and opportunity.

TURKEY

Turkey grew at a rate of 7.5% annually between 2002 and 2006. Following the global recession Turkey was the fastest out of the gate, expanding at levels greater than China (10.3% annual GDP growth in 2011) but has since slowed, averaging 3% growth between 2012 and 2015. Turkey is also dependent on foreign capital and in the summer of 2013 investors pulled their money out in droves, causing the lira to plunge.

The ensuing rise in interest rates only served to choke the economy further and high inflation (8%) combined with president Erdogan’s authoritarian tendencies are a worry to Turkey’s future growth.

So upon closer inspection, Turkey seems to be most vulnerable to falling behind. However, every country has risks and challenges that it is going to have to face in the years to come. While there are many ETFs (exchange traded funds) that might track a “BRIC” or “MINT” index it is always good to fully understand the risks when you invest in emerging markets.

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After all, economic groupings are a dime-a-dozen. Any analyst looking to make a name for themselves is coming up with a catchy name. You could invest in the EAGLEs, the Emerging and Growth Leading Economies, which include Brazil, China, Egypt, India, Indonesia, South Korea, Mexico, Russia, Taiwan and Turkey. Then there’s MIST (Mexico, India, South Korea, Turkey), the Fragile Five (Indonesia, South Africa, Brazil, Turkey, India), PINE (Philippines, Indonesia, Nigeria, Ethiopia), and MIKT (Mexico, Indonesia, South Korea, Turkey).

Bottom line: if you want exposure, you can get exposure. Think of the catchy names as more of a marketing ploy rather than an investment strategy. The advantage to investing in emerging markets is that if you do it right you can achieve a higher return than the dependable, advanced economies. The disadvantage is that many are more fragile than the advanced economies, vulnerable to capital flight and suffering from widespread corruption in many cases.

As always, if you’re going to invest, know what you’re putting your money in.

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