x Abu Dhabi, UAESunday 23 July 2017

CIVETS fund is an exciting blend of thriving new economies

The CIVETS nations are an unlikely group, but thanks to their young populations and diversified, energised markets, they could add bite to your investment portfolio.

Mineworkers drill at the rock face at the Impala platinum mine in Rustenburg, South Africa. The country accounts for 30 percent of the CIVETS fund.
Mineworkers drill at the rock face at the Impala platinum mine in Rustenburg, South Africa. The country accounts for 30 percent of the CIVETS fund.

The emerging giants of Brazil, Russia, India and China, known as the BRICs, are old news. The new, but less catchy, kid on the block is the CIVETS.

CIVETS stands for Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa, six fledgling democracies dotted across Latin America, the Middle East, Africa and Asia, with very little apparently in common.

They are named after the civet, a small arboreal mammal that looks something like a spotted cat crossed with an otter. The CIVETS are a similarly unlikely blend of very different beasts, but could they add bite to your investment portfolio?

Standard & Poor's (S&P), the ratings agency, has just launched the CIVETS 60 Index, which is designed to "measure growth beyond the BRICs". It covers 60 tradeable stocks, 10 from each country, each with a market capitalisation of US$500 million (Dh1.8 billion) or more. South Africa totals more than 30 per cent of the index, followed by Indonesia (28 per cent), Turkey (21 per cent) and Colombia (12 per cent), plus about 6 per cent of Egypt and a tiny splash of Vietnam.

These second-generation emerging markets do have certain things in common: all boast dynamic, rapidly changing economies and young, growing populations, says Michael Orzano, the associate director of global equity indices at S&P.

"They have reasonably sophisticated financial systems and rapidly maturing equity markets, and show all the signs of becoming increasingly important to international investors."

The similarities don't stop there. "Their economies are relatively diversified, not overly reliant on natural resources and are attracting increasing foreign direct investment," Mr Orzano says.

The CIVETS, with a total population of 580 million, combine massive potential with turbulent recent histories, including drugs wars, colonial struggles, terrorism, revolutions, dictatorship and apartheid. But a decade ago, the BRIC members looked similarly unlikely candidates for growth - and look what happened to them.

Recent performance has been mixed. Colombia returned an impressive 36 per cent over the past 12 months, according to MSCI Barra, a US-based provider of investment decision tools for institutions and investors worldwide, easily beating returns of 6 per cent in India, 8 per cent in Brazil and 14 per cent in China.

Indonesia also grew an impressive 34 per cent over the past year and South Africa returned 25 per cent, but not all the CIVETS are posting runaway growth. Turkey delivered a modest 8 per cent, Vietnam grew just 1 per cent, while Egypt plunged 29 per cent, thanks to recent political turbulence.

The CIVETS are a "ragbag of countries with little in common", but they do throw up plenty of investment opportunities, says Tom Elliott, a global strategist at JP Morgan. "Colombia is particularly interesting. It is slowly tackling its terrorist problem, it has a fairly well-managed economy and is starting to attract sizeable investment. It is a young story and a good one."

Drug trafficking remains a problem, but the country's pro-market policies have boosted growth. GDP grew a healthy 4.6 per cent last year, and the government is busily pursuing free-trade agreements with Canada and countries in Latin America, Asia and the EU.

If Colombia is a young story, the South Africa growth story is more established. The country was recently invited to join the annual BRIC forum, becoming the "S" in BRICS. Its geographical size, regional dominance and economic potential suggests it could emulate the success of the other BRIC members. But it won't be easy, Mr Elliott warns.

"South African companies are heavily unionised, which makes it difficult to change working rosters or adapt to prospective new markets, and growth has been disappointing," he says. "South Africa does have natural resources, manufacturing and tourism, and really should be doing a lot better than it is."

Mr Elliott says the CIVETS may have many differences, but investors all face one common challenge.

"Lack of liquidity. It is difficult for mutual funds investing in this area because there are still only a relatively small number of stocks traded, on low volumes. As overseas money starts pouring in, it could end up artificially inflating share prices. The danger is that you could end up betting against yourself," Mr Elliott says.

His emerging market favourites include one BRIC and one of the CIVETS, namely Brazil and Turkey. "Turkey is a very good long-term story. It has also been building bridges to Europe. It has a growing manufacturing sector and cleaned up its banking industry after suffering its own crisis in 2001."

Brazil and Turkey aren't immune to short-term volatility, but should prove rewarding for long-term investors. "You could put your money away in either of these two countries and forget it for years. Try to invest in the local currency, as you might expect these to strengthen against western currencies," Mr Elliott says.

Turkey has rebounded strongly since the global downturn to grow 8 per cent in 2010, says Nick Price, the manager of Fidelity's Emerging Europe, Middle East and Africa fund. "Its banking system survived the global crisis in relatively good condition, and the government budgetary and public debt position is significantly better than many countries in the euro zone."

Turkey's EU accession process may have met resistance in France and Germany, but it has helped to boost the role of the country's private sector, bolster its financial-services industry, and create a more solid social-security system.

"Turkey has implemented reforms and improved its infrastructure, while retaining its fiscal discipline. GDP per capita has more than doubled in the past decade and the country has favourable demographics, with about a quarter of its 70 million-plus population under the age of 15," Mr Price says.

In population terms, Indonesia is by far the largest CIVET, with about 237.5 million people, more than Brazil (190.7 million) and Russia (143 million and falling).

In December, the Indonesian government set out plans to make it one of the world's 10 largest economies by 2025, and now could be a good time to get in early, Fidelity says. Again, a large and youthful population with rising disposable incomes should fuel growth. Indonesia's GDP is rising at about 6.5 per cent a year.

Egypt isn't for the fainthearted. The country is still in turmoil after Hosni Mubarak was forced out of the presidency, but this could be a great opportunity for brave investors, says Tarek el Refai, the senior executive officer at the Dubai branch of the investment company BNY Mellon. "Egypt has a $3 billion monthly balance of payments deficit. Its reserves have fallen by 35 per cent in the past six months. Tourism, which is worth 10 per cent of its GDP, has yet to recover. Religious tensions are growing. But compared to Libya, Syria and Yemen, the political situation is relatively under control," he says.

Egypt boasted a promising economy before the revolution and the fundamentals haven't changed. "It still has a young population. It still has low wages. It still has a fast-growing IT sector, which drove the Facebook revolution. And it is still a multi-language sector, which can offer call centres in French, German, Dutch and even Hebrew. Tourism is down, but it should recover. Egypt is a regional leader, with 25 per cent of the Arab population. Where it goes, others follow."

The question is, where is it going? Nobody knows for sure. The country has $155bn worth of debts and the economy has shrunk by 7 per cent since January. We may have a clearer idea after the elections, slated for September. "If you take a chance and invest before the uncertainty is over, you could reap the benefit. If you wait until after the elections, you may have left it too late. It depends on your appetite for risk," Mr el Refai says.

As rising wages and inflation undermines BRIC competitiveness, investor attention will increasingly switch to CIVETS and beyond, says Steve Gregory, the managing partner at Holborn Assets, a financial services company in Dubai. "The BRICs aren't so young now, Russia and China both face demographic challenges. Other emerging countries may offer better opportunities in sectors such as infrastructure, education, tourism and health care, and they aren't burdened by huge government or personal debt."

Just because the BRICs have enjoyed a barnstorming decade doesn't mean that other emerging markets will automatically join in the fun.

The CIVETS are likely to be more volatile than traditional markets and you have to factor in currency and political risk. "Yet last year's top markets were Thailand and South Korea, despite clear political risks in each country," Mr Gregory says.

As yet, none of the major investment houses are marketing CIVETS-branded mutual funds or exchange-traded funds. "But keep your eyes peeled, as I feel sure that CIVETS funds will be opening soon. You can buy individual country funds, however, while mutual fund provider Castlestone recently launched a Next 11 Emerging Markets fund, which includes Indonesia, Vietnam, Egypt and Turkey," Mr Gregory says.

You might also like to choose from funds such as Templeton Frontier Markets, Sarasin EmergingSAR New Frontiers, Baring ASEAN Frontiers, HSBC GIF Turkey Equity, Fidelity Indonesia, Fidelity Latin America and JPM Middle East Equity.

If you haven't heard of the Next 11, it bundles together disparate countries, in this case Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam.

Fidelity the fund manager recently narrowed this to just four, Mexico, Indonesia, Nigeria and Turkey, collectively known as, you guessed it, MINT. Is there no end to the acronyms?

It was Jim O'Neill at Goldman Sachs who started the bandwagon rolling by inventing BRIC back in 2001. Now every fund-management company wants to have a pop at acronymical glory.

pf@thenational.ae