Tuesday, October 26, 2010

Forget BRIC, It's Time For CIVETS

¹²Forget BRIC, It's Time For CIVETS

By Stephen Simpson | 26 October 2010

Wall Street loves sound bites and handy acronyms. Whether it is ROE, NPV or NAV, there is no shortage of handy terms. For growth-oriented investors, BRIC has been one of the most important acronyms of the past ten years. Encompassing the dynamic economies of Brazil, Russia, India and China, BRIC was a guidepost for many investors and there is no questioning the strong stock performance of this group (particularly China and Brazil). (Historically, international investing has worked out well for investors, but this may no longer be the case. See Does International Investing Really Offer Diversification?)

Things change, though, and it may be time for investors to pay more attention to a new name. A civet may be an odd-looking creature (imagine a cross between a raccoon and a cheetah), but the CIVETS could be the next major destination for international investing.

Meet The Civets
CIVETS is an acronym, reportedly coined by Michael Geoghegan at HSBC (NYSE:HBC), for Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. Investors may think of this as a 'second-generation' of emerging economies [[aka, Frontier Markets: normxxx]], as these countries generally have fast-rising (and young) populations, relatively well-established financial infrastructure, internal stability and a pathway towards significant economic growth and potential co-leadership in their economic spheres. Keep in mind, though, that not all of these countries posses these qualities to equal levels.

What's more, none of these countries is so stable or well-established that back-sliding and disappointment could not occur [[and seemingly abruptly and without warning, even if you are paying attention: normxxx]]. Corruption is still a significant problem in many (if not all) of these countries, and investors should not over-estimate the openness of these markets or the ease of investment. In others, an investor's options will be limited in comparison to a more-developed country like South Korea or even China and Mexico.

Of course, an assemblage of names like this is always at least a little arbitrary. Egypt, for instance, seems to have more value as a vowel than as a peer member of this group. Along similar lines, investors may find countries like Poland, Hungary or Sri Lanka to be more intriguing, even if they do not lead to a clever-sounding acronym. Accordingly, country-by-country economic due diligence is vital unless investors want to spread their bets across the entire group. (Find out how these worldly offerings can spice up your portfolio. Check out Go International With Foreign Index Funds.)

How Investors Can Make A Play
While each one of the CIVETS countries has a domestic stock market, it is not necessarily easy for the average American investor to take part. Relatively few American brokerages offer international trading, and those that do often restrict it to wealthy investors and/or charge handsomely for the service. Still, for those willing to do the work (and pay the price), direct investing is a viable option.

Although ADRs often give American investors a cheaper and more liquid investment alternative, here too that is not much of an option. There are a handful of CIVETS companies with ADR programs in the U.S.— like Bancolombia (NYSE:CIB), PT Telekom (NYSE:TLK), and Sasol (NYSE:SSL)— but most of the available ADRs are unsponsored and relatively illiquid. That leaves ETFs as the best option for most investors. In every case, there is at least one available country-specific ETF for the CIVETS members.

'Frontier Markets'; [1]; [2]; [3]
Columbia      Global X FTSE Colombia 20 (NYSE:GXG)
Indonesia     Market Vectors Indonesia (NYSE:IDX), iShares Indonesia (Nasdaq:EIDO)
Vietnam       Market Vectors Vietnam (NYSE:VNM)
Egypt         Market Vectors Egypt (Nasdaq:EGPT)
Turkey        iShares Turkey (NYSE:TUR)
South Africa  iShares South Africa (NYSE:EZA)
Poland        Market Vectors Poland (NYSEArca: PLND)
Hungary       Eastern Europe ETFs
Sri Lanka     To Be Determined

Investors frustrated by this narrow list of options should take heart in the BRIC example. It was quite challenging to invest in those countries in 2000/2001, but there has been a tremendous boom in the years since and there is no shortage of potential plays on these economies now (though investors still have a dearth of choice in individual company stocks). It seems reasonable to assume that the CIVETS countries will follow a similar trajectory— investing today will be expensive and inconvenient, but market growth and investor interest will ultimate lead to more (and better) choices.

The Bottom Line
Investors who want above-average portfolio performance need to be willing to take on more risks and to go where the growth is likely to be. Emerging economies like CIVETS certainly fit the bill— they have large, young populations, generally ample natural resources and favorable geography to fuel their progress. The path will be bumpy, punctuated with great steps forward and occasional stumbles, but patient investors may find that, like BRIC in the first decade of this century, investing in CIVETS is a growth opportunity they should not ignore. (Going global may help increase your portfolio return but is the unique risk worth it? Check out Why Invest In International Equity Mutual Funds?)

[[I have found that the best way to invest in an Emerging Market country is to wait for its stock market to crash— they invariably do so in synch with the golobal economy and in response to internal or regional events— acertain that the reason for the crash is not not likely to be of long standing, then invest. You only have to be patient.: normxxx]]

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