Introduction to Investment Funds – The CIVETS Nations

Throughout 2011 a great deal of focus within the financial world was dedicated to the Investment Fund potential for investors willing to look at the CIVETS nations. Extensive analysis and commentary was afforded to the growth and development of the economic landscape within Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa.

A host of investments have been launched over the past 12 months and the activity within these nations has continued to grow as bold investors look to target the world’s fastest growing economies.

The reasons for this heightened activity are varied.

For example, the CIVETS nations boast a collective population of circa 600 million representing some 8pc of the global population, a population which is characterised by being both young and ambitious. Therefore, the growing consumption of these nations means that market demand is strong for core commodities and this is further bolstered by population dynamics which appear fixed on growth in all aspects of life.

In this respect the CIVETS nations mirror many of the social and industrial qualities inherent in larger developing markets such as the BRIC economies – Brazil, Russia, India and China. In fact, in some instances, the growth rates of the CIVETS nations are now outstripping those of the established BRIC countries.

Another crucial feature is that, when looked at as a whole, the CIVETS nations don’t have the chronic debt problems that are currently being experienced in the developed world. This is a major positive feature for investors seeking both short and long-term returns.

Here we take a closer look at the key features of the CIVETS nations and their influence upon the Investment Fund potential. Please do remember that the value of investments can go down as well as up and you may get back less than you invested.

Colombia:

The current Government of Colombia has expended much time and effort stabilising the security situation throughout the country and developing the national infrastructure.

It has been very eager to increase trade and business activity throughout its industrial regions and has successfully reinvested portions of oil revenues to vastly improve the commercial and social environment.

An often unknown fact is that Colombia is the third largest exporter of oil to the USA and so has a very solid basis for development due to this constant revenue stream.

Apart from oil the country’s principal industries are coal, gold, textiles, food processing, clothing & footwear, beverages, chemicals and cement giving it a strong foothold in the core commodities markets in the US.

According to a report posted on the Guardian online its economy grew 4.3% in 2010, compared with 2.8% for the US which is of obvious attraction for the foreign investor. Only time will tell if this growth will continue and whether or not the relative political and social harmony can be maintained.

Indonesia:

With an estimated population of 245.6 million, Indonesia is the fourth most populous country in the world. Almost half the economy is industrial.

The Indonesian government has also stated its desire to see Indonesia develop to become one of the world’s 10 largest economies by 2025. If this objective is successfully completed then early investment in Indonesian assets could provide strong returns.

Like other CIVETS nations Indonesia can be seen as a positive investment destination due to positive demographic features such as a young, ambitious population with growing levels of disposable income and so market demand is strong and strengthening. Its position as a manufacturing hub also helps a positive long-term outlook.

According to the Wall Street Journal some fund managers see exposure best achieved through local subsidiaries of multinationals due to the solidity of their existing structures.

As a result long-term outlook appears healthy for investors.

Vietnam:

The low cost of labour and the further development of the manufacturing infrastructure means that Vietnam has grown in its attractiveness for foreign investors despite its economic problems over the last 5 years.

Its economy is 41% industrial and the World Bank is projecting 6% growth this year rising to 7.2% in 2013 – according to the Wall Street Journal Online – which is a good outlook.

The potential for lower taxes for fund management companies is also an interesting development in this particular market.

There are however lingering concerns regarding Vietnam’s uncertain outlook for interest rates and inflationary pressures, as well as the fact that the country continues to pursue a fast-growth policy. Standard & Poor downgraded Vietnam in 2011 amid warnings that the banking system was vulnerable to shocks and raised concerns about bad debts.

Egypt:

Egypt’s major assets include fast-growing ports on the Mediterranean and the Red Sea, joined by the Suez canal, that are seen as potentially important trade hubs to connect Europe and Africa, as well as vast untapped natural resources.

Egypt also benefits from strong trade and investment relations with the EU. In 2010 agriculture made up roughly 10% of the economy, industry 27% and services 64%.

Deals have also been signed by Egypt and China that will see the two nations collaborating on the production and distribution of automobiles across North Africa. This is positive news for Egyptian business and also indicates Chinese commitment to the North African marketplace.

Chinese automaker Zhejiang Geely Holding Group and Egyptian auto assembler GB Auto SAE expect to produce up to 30,000 cars a year a few years from now, and aim to increase that to 50,000 a year, a Geely source told the Wall Street Journal.

It should be remembered however that the prospects for continued and solid investment in Egypt are seriously marred by an unstable political situation however.

Turkey:

The Turkish economy has proved resilient to the global downturn and the Turkish government’s budgetary and public debt position is arguably significantly better than many countries in the eurozone.

The increasing influence of the private sector over recent years coupled with the greater levels of efficiency and resilience within the financial sector has had positive results. A more solid social security system has also helped to create a stable investment environment.

Turkey also has experience of recovering from economic difficulty as it did so successfully after its own banking crisis in 2001.

Turkey has also seemingly benefitted from the economic woes of neighbouring Greece. For example Turkish imports from Greece jumped nearly 40% and the number of Greek firms registered to do business in Turkey rose by 10.4% in 2011 according to Turkish news site Hurriyet Daily News.

This would seem to suggest that Turkey offers solid investment prospects. However, according to a Financial Times blog, Turkey’s “huge” current account deficit, now about 10% of gross domestic product is a concern but they also state that Turkey’s economic bottom line looks extremely healthy compared to its European neighbours. Its GDP grew 8.9% in 2011

South Africa:

South Africa is a country that exhibits qualities of both emerging and developed markets. Historically foreign investors have been attracted to South Africa’s rich and abundant natural resources, in particular gold. Foreign direct investment is also steadily increasing as the government encourages more international companies to establish themselves there. But it is the mining sector that remains dominant in South Africa due to the large reserve of natural resources and the stability of the mining infrastructure already in place.

The rising commodity prices are bolstered by renewed demand in its automotive and chemical industries, as well as the 2010 FIFA World CUP, have helped South Africa resume growth after it slipped into recession during the global economic downturn.

It is worth noting however that South Africa had the slowest growth of all the Civets last year and has suffered unemployment of 25%. World Economic Outlook from the International Monetary Fund noted: ‘A surge in unemployment, high household debt, low capacity utilisation, the slowdown in advanced economies, and substantial real exchange-rate appreciation are making for a hesitant recovery’.

Conclusion:

It is clear that there is significant potential for investment fund growth throughout the CIVETS nations. The demographic make-up and industrial structures mean that there is a positive financial outlook for hungry investors.

However, optimism should be tempered for a number of reasons and some analysts are warning against rushing into some potentially unpredictable and unstable markets.

Political and social upheaval, as well as inefficient and ineffective standards of corporate governance, results in an uncertain economic environment and profound currency fluctuations. The CIVETS nations are currently well behind the recognised leading emerging markets of the BRIC countries and the shrewdest investors will only apportion a manageable amount of their investment portfolio to markets within the CIVETS nations.

Related posts