Although the previous decade heralded the arrival of the BRIC
(Brazil, Russia, India and China) nations, the current decade has a
new class ofemerging markets favored by investors. In fact, those
markets, which are also known by a handy acronym -- CIVETS
(Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa),
have outperformed the BRICs in recent years.
looked at the CIVETS nations
in the summer of 2010 and here is how they have performed
BRICs vs. CIVETS
(Market returns as measured by a leading country-specificETF
At the time, I suggested investors steer clear of Egypt, and
this portfolio would have gained 16% if Egypt were excluded,
outperforming the BRICs by 23 percentage points or by nearly 10% on
an annualizedbasis .
Forget emerging markets?
Yet in that time frame, the S&P 500 has gained a robust 49%. In
effect, you would have been wise to simply ignore foreign markets
during the past few years and save yourself alot of trouble. But
that's not the way this period should be viewed. Short-term phases
of relative performance do not highlight long-term dynamics at
play, as well as the opportunities for investors.
Yet the past few years have taught investors that these acronyms
are helpful only to a point. The BRICs are substantial economies
and hold more than roughly half of the world's population. The
CIVETs can be seen as regional hubs -- countries such as Turkey and
South Africa conduct a great deal of trade with their
Yet these acronyms are not helpful in determining where to
For example, Russia, Egypt and India are beset by so many
problems that they carry too much risk. In any given year, these
countries'stock markets can zoom ahead, but it's hard to see how
theywill outperform over the long haul.
Instead, focus on countries that are making the right moves when
it comes to infrastructure development and middle-class nurturing.
written in the past
, the theme of fast-growing middle classes in many emerging markets
stands out as one of the top long-terminvesting angles, even if
these markets have underperformed the S&P 500 in the past few
There will be bumps in the road. Vietnam and Turkey possess
greatfutures , but their growth is hampered by inflationary
bottlenecks. Colombia and Indonesia are examples of outstanding
mid-sized markets that have all the attributes of sustainable
long-term growth. Indonesia has done a good job of tackling endemic
corruption, which is leading to solidgross domestic product (
) growth rates.
And Colombia is nearing the end of a brutal civil war. On a
recent trip, I saw dozens of skyscrapers rising up across the
country's top cities. It's hard to understate the powerful effect
of Colombia's "peacedividend ," though it is a bit troubling that
the government and the rebels have not yet signed a final
Blame it on Rio?
It's hard to pin down why Brazil, as measured by the
iShares MSCI Brazil CappedIndex (NYSE:
ETF, has fared so poorly, underperforming the S&P 500 by a
stunning 62 percentage points since August 2010. To be sure, the
Brazilianeconomy grew a tepid 2.7% in 2012 and is likely to grow
less than 2% this year. This is an almost inevitable slowdown after
years of solid growth.
Yet investors would be unwise to project Brazil's weak growth
into the future. The country is blessed with a vast trove of
natural resources, a fast-growing middle class, heavy (though
belated)investments in infrastructure, and most importantly,
vibrant growth with trading partners such as Chile, Colombia and
Mexico. Brazilian tourists are among the most avid shoppers in many
of the world's top cities, a sure sign of fiscal health.
In many respects, Brazil has the same characteristics that the
United States had in the 1950s. In both instances, rising domestic
consumption,productivity and trade set the stage for an extended
For perspective, the Brazilian ETF is back at levels seen in
2007. Since then, the Brazilian economy has grown from $1.4
trillion to $2.5 trillion. Ifmarket value-to-GDP is a worthwhile
metric, then Brazilianstocks are a certifiable bargain.
Risks to Consider:
These emerging markets have lagged behind the United States,
although a pullback in U.S. stocks would create a headwind for
these markets. That underpins the notion that these markets are
best viewed as long-term holdings.
Action to Take -->
The BRICs and the CIVETS hold valuable markets. Leaving aside
China, which possesses great long-termupside with perhaps near-term
indigestion, let's focus on the best of these acronyms. In my
opinion, they are Brazil, Turkey, Vietnam, Indonesia and
Indeed, this is the perfect emerging markets portfolio (though
you could easily substitute countries such as Thailand for
Indonesia, or Mexico for Colombia). Each country possesses robust
long-term growth prospects, and as each market has underperformed
the United States since then, it's time to give them fresh
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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