Despite the late January/early February 2010 correction in international markets, there remains a certain sexiness in Emerging Markets, in particular the BRICs, that combination of Brazil, Russia, India and China. That sexiness stems from relatively prudent economic policies, generally positive demographics and growing significance as manufacturers and/or commodity exporters. Investors are also demonstrating an appetite for these markets. In January, the BRICs raised $6.7 billion in 26 initial public offerings, the highest amount ever for the month for January according to Thomson Reuters. Although February was marked by a sell-off in Emerging Markets and BRIC stocks and bonds, the growing stature and depth of the BRIC experience is going to remain a long-term factor. This is leading to the rise of another group of Emerging Economies in the eye of investors, South Africa, Turkey, Indonesia and Colombia, the "STICs" in a move that is already underway.
The Rising Tide
Considerable attention has been given to the BRICs in the 2008-09 economic crisis. The combination of Brazil, Russia, India and most importantly China, has and is expected to remain an important force in the global economic recovery. Indeed, in the OECD's November 2009 economic update, the starring role was given to China and the nation's stimulus package, willingness of continue to buy U.S. Treasury bonds and ongoing purchases of commodities, helped make certain the 2008-09 recession did not become the Great Depression, Part II. Although Russia's experience was more challenging in the recent downturn, China, India and Brazil did not fall into problematic debt crises and economic freefall. Even Russia did a reasonably good job weathering the storm (especially when compared to its last round of trouble in the late 1990s). Instead they proved more resilient than many expected. Jorgen Elmeskov, the OECD's chief economist noted in late 2009: "The non-OECD countries weren't affected by asset-price meltdowns as much and up to the downturn ran sensible economic policies."
|STIC Real GDP|
|Sources: IMF, November 2009|
There is something to be said of sensible economic policies. Indeed, sensible economic policies allowed a number of the major non-OECD countries to maneuver through one of the most difficult economic downturns since the 1930s, which was just as devastating to the non-industrialized world at the time. One of the more intriguing items to be pulled from the historical grab bag is that development patterns changed somewhat over the last 30 years, with the re-integration of two of the world's largest countries in terms of geography and population size, China and India. This, along with Russia's economic restructuring and reintegration with the West and a more sure-footed Brazil helped create the BRIC concept.
The BRIC idea is based on the rise of China and India as manufacturing/tech-powered economies, working with the commodity-based giants of Russia and Brazil. By 2050 the combined economies of the BRIC could eclipse the combined economies of the current richest countries of the world, i.e. the United States, Japan and Western Europe.
The BRIC idea has some strong points and a number of weak ones. However, the current combination has made considerable strides in the size of their economies and certainly in the cases of Brazil, China and India there has been some real progress in terms of economic diversification and social improvements. The BRIC idea has also helped push the idea that the largest and more critical Emerging Market countries deserve a place in governmental forums deciding global policy, a development evident in the shift from the G-7 (the U.S. UK, Canada, Germany, France, Italy and Japan) to G-8 (adding Russia) to the G-20 (which since its inauguration in 1999 included Brazil, China and India). The BRIC countries have been successful in becoming more significant players in the global economy and policy making impacting that arena.
New Group of Emerging Markets, the "STICs" Rising in Prominence
We would argue another loosely-formed group of countries is on the rise - the STICs. Not as strong or as large as the BRIC economies, South Africa, Turkey, Indonesia and Colombia are playing an increasingly important role in the global economy. With the exception of Colombia, this has already been partially recognized by their inclusion in the G-20.
What is significant about the STIC group of countries is their complementary nature in the global economy, both for the OECD and BRIC countries. Indonesia, Colombia and South Africa are significant players in the global commodity trade, while Turkey is emerging as a major manufacturing exporter, especially to its lesser-industrialized neighbors in the Middle East and Central Asia. Turkey is also a major trade partner for Russia and the European Union. Indonesia benefits from being strategically located between China and India, with the former one of its major trade partners. Colombia's major trade partners are the United States and Venezuela, but its importance to China is growing, especially as it is a major exporter of coal, petroleum and ferro-nickel as well as a number of foodstuffs. South Africa is one of the world's major exporters of coal, diamonds, and other metals, much of it earmarked for China, which emerged as its major trade partner in the first half of 2009.
An additional G-20 point is that other Emerging Market countries are members, including Argentina, Saudi Arabia, and Mexico. We have excluded Mexico as it is an OECD country and is the world's 18th largest economy, with its trade and foreign investment closely entwined with the North American Free Trade Area. We also exclude Saudi Arabia in this line-up as it is much like Venezuela - an oil company with people attached. So goes oil, so goes Saudi Arabia. Argentina fails to make the grade. Despite its membership in the G-20 and some significance in international commodity markets, the economy has had considerably bad luck in having a succession of populist leaders who have consistently squandered its potential.
In contrast to Argentina's propensity to damaging populist economic experiments, the STICs have accepted the fundamental idea that market economics of some type is necessary to promote local entrepreneurship, encourage foreign investment, and develop domestic markets. This does not mean market conditions in any of these countries are best practices, but they are better and more efficient than many Emerging Market countries.
The STIC's share another factor - they have relatively positive track records on fiscal and debt management policies. This is more true of Colombia and South Africa, which avoided major defaults on their external debt, and even Indonesia though it was forced to seek the assistance of the International Monetary following the Asian financial crisis in 1997-98. Turkey did reschedule its external debt during the 1980s and one of the major worrisome factors that hangs over its economic horizon is the still heavy debt burden. Despite that, Turkey has managed its way through the most recent economic crisis without a major crisis.
There has been a relatively prudent approach to public finances. This has come despite public pressure to loosen the floodgates of public spending in all four countries at various points. South Africa, with over 20 percent unemployment and coming from a long period of apartheid governments of white rule, has been exceedingly responsible in not turning to more populist spending programs. This occurred even with three changes in presidential administrations since the end in apartheid in 1994.
The last point to consider is that the STICs have benefited from the rise of the BRICs. Clearly the reintegration of China and India into the global economy, not to mention Russia's integration into the capitalist global economy, has opened up new trading opportunities, flows of capital and the spread of non-Western multinational corporations. In a sense, what the BRICs bred was another round of economies that are complementary and are likely to see similar growth patterns in the decades ahead. Additionally, these countries will continue to attract foreign investment, some of it from the BRICs. China invested around $7 billion in South Africa and last year and displaced Germany as the African country's largest trade partner.
There is decidedly room at the global investment table for the STICs. Michael Power at Investec Asset Management in Cape Town noted in early February 2010: "South Africa is becoming the corporate captain of Africa because it has more pan-African companies than any other country in Africa and this gives it a seat at the table of the BRICs."
The economic crisis of 2007-09 has left a different world in its wake. The stumbling of the Anglo-American economies and a painful rethinking of that model of free-wheeling capitalism has left the field open to those economies still standing. Considering that continental Europe's more safety-prone/less entrepreneurial approach has also been hurt by the global downturn and a subsequent round of jitters over some of its more deficit-prone countries (like Greece and Portugal), more eyes and investor money have turned to Emerging Markets, first to the BRICs, but also to the next group of BRICs, which we are calling the STICs. Although the STIC economies are not of the same size and scope as their forerunners, they have a track record of strong economic growth, prudent management and are pursuing market-oriented policies. Last, but hardly least, they have embraced globalization, finding an increasingly complementary niche with both BRICs and OECD countries.
For investors, these countries and their companies are going to offer long-term opportunities. Although considerable challenges remain and there is no such thing as a straight upward trajectory in investment returns, the overall trend lines point to continued growth and weight in the international system. That is significant considering that OECD countries are not likely to see dynamic expansion for many years.