Beyond BRICs: 2012’s Top Global Investing Hot Spots

Beyond BRICs: 2012’s Top Global Investing Hot Spots

REUTERS/Victor Ruiz Garcia

In light of the still-soft economy and the dreaded fiscal cliff looming ahead, investors may well be relieved that the S&P 500 is now 12.75 percent ahead of where it began the year, even if it’s trading below its highs of early autumn.
There are some other markets out there that have fared far better, though, and only one of them is part of the “BRIC” group of nations that Goldman Sachs analysts predicted would dominate the global economy and investor returns by midway through this decade. Despite a faltering economy, India’s Bombay Sensex has gained about 26 percent this year. Brazil, on the other hand, has spent much of the year struggling to avert recession and trying to cope with the impact of low interest rates in the U.S. on the dollar and thus on the competitiveness of its own currency, the real. Its Bovespa index is just 3 percent higher on the year.
China’s economic growth has slowed dramatically over the last two years, and in spite of early signs of a possible uptick in industrial production and rumors of more stimulus from monetary policymakers in Beijing, hasn’t done much for stock investors or even for companies counting on growth in the region. The Shanghai Composite Index has lost 6 percent in 2012.
While the BRICs have failed to break out, the list of top stock-market performers contains some that could be labeled “first generation” emerging markets (Thailand, Indonesia, Mexico) and others that institutional investors now commonly refer to as “frontier markets” (Pakistan, Turkey). Then there is South Africa, which has made the leap from that frontier category into an honorary fifth member of the BRIC group, turning BRICs into BRICS.

Pakistan is one of the most intriguing members of this group. You may not want to head there for a relaxing vacation any time soon – you’d have to deal with everything from power blackouts and civilian protests to what amounts to a civil war against Taliban forces in some regions of the country – but it’s a place where, if you had sent your money, you would have earned some eye-popping returns. Pakistani stocks have generated gains of about 47 percent so far this year (in local currency terms), according to data from Haver Analytics published by Ed Yardeni of Yardeni Research.
To some extent, the health of Pakistan’s economy is masked by the fact that about half of it is the, ahem, “informal” economy (in other words, a black market or grey market). Even so, it’s clear there is a consumption boom underway. There’s enough growth in the formal economy, with consumer spending up 26 percent, to propel Pakistani corporate profits higher, allow these companies to boost cash balances and dividend payouts – oh, and stocks there trade at about 7 times earnings. Nor has volatility been as much of a problem as you might imagine: Chillingly, investors now are so accustomed to terrorist attacks that reports of a new one don’t tend to sent markets into a tailspin.
Turkey has fared even better than Pakistan, in spite of the increasingly horrific war in neighboring Syria that has constantly threatened to spill over the border between the countries. Last month, Turkey won its first investment-grade debt rating since 1994 (from Fitch), a sign of improved government finances despite a large current account deficit. While Moody’s may not be in any hurry to follow suit, that ratings agency did say just before Thanksgiving that it saw Turkey as the only European nation with a positive outlook.
There’s also some healthy, if not remarkable, growth taking place: perhaps 3.2 percent this year, and 4 percent next year. While many overseas investors have stuck to the bond market – where yields have plunged – Turkey’s Central Registry Agency began reporting an uptick in the amount of stock on the Istanbul Stock Exchange back in March. Rumors of easing of monetary policy sent the Istanbul Stock Exchange 100 to a new record on Wednesday. So far, the market is ahead about 48.3 percent in local currency terms.
Violence in South Africa hasn’t been a deterrent to investors, either. Even as striking platinum miners were killed, arousing outrage throughout the country, investors were putting money into consumer products, telecom services and other companies trading on the Johannesburg stock market, sending its index to fresh highs. (In local currency terms it is up 19.4 percent and at times this year has been the top-performing global stock market.) Along with the Nigerian market, the South African exchange also is a way to play Africa’s emergence in the global economy. It seems possible that Africa could end up becoming in coming years what Thailand, Korea and Mexico were two decades ago. South African stocks playing the fastest-growing mobile phone market in the world include Vodacom, which serves not just South Africa itself but Tanzania, Congo and Mozambique.
Investors who have dabbled in emerging markets may be more familiar with a cluster of Southeast Asian countries that have delivered strong gains this year. Besides India, both Thailand and the Philippines are ahead nearly 30 percent so far this year. Thailand may only become more interesting in the coming months and years, as its companies may be among the first to profit as Myanmar/Burma re-enters the global economy; the Siam Cement Company already has announced plans to build a big plant in Burma. In the Philippines, anxiety about the U.S. fiscal cliff has begun to nibble away at that market’s gains, as has the fact that valuations appear stretched and the market’s technical picture – given the string of new highs set this year – isn’t all that robust.
As Yardeni points out in his brief look at these markets – all places in which he says global companies will be looking to invest in the coming years – “these countries aren’t the most trouble-free places in the world.” But, he adds, “global investors seem to be determined not to let the bad news get in the way of making money.”
Happily, there are many ways – direct and indirect – to profit from these trends. When the dean of emerging markets investing, Mark Mobius, began to oversee the Templeton Emerging Markets Fund in 1987, it was the only fund of its kind available to investors in the United States. These days, funds focused on emerging markets are as ubiquitous as ones investing in technology stocks. Investors can now choose from a seemingly endless list of exchange-traded products that provide exposure to themes (the BRICs), regions (Southeast Asia, Africa, the Middle East) or individual countries.
Look for a general “frontier markets” fund to add to your portfolio for some exposure to this kind of explosive growth. It may be hard to predict which of these countries will post the biggest stock market returns next year, but I’d be willing to bet that once again the list of top gainers is unlikely to include the United States, Europe or Japan.