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The Rise of the Civets investment funds

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Rise of the Civets investment funds
By Louise Greenwood
BBC business reporter
A host of investments are being launched targeting the world's fastest growing economies.
But analysts are warning of a new "gold rush" into some potentially unstable markets.
This week has seen two foreign presidents arrive on state visits to the UK, keen to improve business links and attract investment.
The arrival of Turkey's Abdullah Gul and Colombia's Juan Manuel Santos has thrown attention on the so-called Civets (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa) group of developing nations.
The growth rates of these countries are now far outstripping those of the established Bric (Brazil, Russia, India and China) countries.
Turkey saw its annual growth rate hit 10.2% in the first half of 2011, according to the national statistical institute Turkstat.

The country boasts a diversified, skilled economy, low levels of public and household debt, and a growing population, half of which is aged under 30.
The members of the Civets group represent 8% of the global population.
Now financial firms are keen to tap into their growth potential.
New opportunities
In May, Standard & Poors launched its S&P Civets 60 Index, which tracks the top 10 performing stocks on each local exchange.
Individual funds are also springing up, targeting Civets and so-called "next eleven" nations, such as the Philippines, Nigeria and Iran.
HSBC launched a purely Civets based fund in May.
It tracks up to 60 of the biggest listed firms in the six member countries, in sectors like consumer goods, financial services, telecoms and energy.
The three biggest economies, Indonesia, Turkey and South Africa, account for 75% of the fund.
Philip Poole, HSBC's global head of investment strategy, explains the potential appeal to ordinary investors.
"We see the future as being in emerging markets. They don't have the debt problems that we have in the developed world, that is one positive characteristic," he says.
"We think the consumption story will really be emphasising emerging market demand, and those population dynamics are very important in this," Mr Poole adds.
Volatile investment
Some analysts however are becoming increasingly concerned about this new investment rush.
They point to problems like currency fluctuations.
The Turkish lira has lost 16% of its value against the dollar in the past three financial quarters, making it one of the worst-performing currencies of 2011.
Standards of corporate governance in many of these countries are often considered to be poor, but the biggest risk of all is political instability.
Egypt's main stock market the EGX 30 has fallen almost a quarter since the start of the year, after the events of the Arab Spring.
Last week, Standard and Poors down-graded Egypt's credit rating to BB minus, pushing it further into junk status.
Mark Dampier, head of investments at Hargreaves Lansdown, says other Civets nations are vulnerable.
"They are very small, they are emerging, but they come with a lot of volatility and a lot of political risk. So these aren't really for the mainstream (investor)," he says.
Tom Biggar, of Torquil Clarke Invests, says: "They have wrongly been touted as an alternative to Brics and emerging markets, but they are not in the same category.
"The link between the Civets nations is tenuous - adventurous investors should only consider (having) no more than 5% of their portfolio in this area," he adds.
Both investment managers warn that management fees and set up costs are the top end of the price range.
With even the US and stronger Eurozone countries struggling, there is no doubt fund managers are having to cast their nets wider to find growth in the world economy.
"At some point risk appetite will stabilise," says Philip Poole of HSBC.
"Then investors will start to look for value, and we think they'll find that value in these types of stories."
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The CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa)[1] is an acronym for favored emerging markets coined in late 2009 by Robert Ward, Global Forecasting Director for the Economist Intelligence Unit (EIU).[2] The term has also been used by HSBC's chief executive Michael Geoghegan. These countries are favored for several reasons, such as a dynamic and diverse economy and a young growing population.[3] This list can be compared with the Next Eleven devised by Jim O'Neill and Goldman Sachs - having a few differences, but many similarities - as well as the G20 developing nations

Origins of the Term

The acronym was coined by Robert Ward, Global Director of the Global Forecasting Team for the Economist Intelligence Unit, and was made widely public by Michael Geoghegan, President of the Anglo-Chinese HSBC in a speech he gave to the Hong Kong Chamber of Commerce in April 2010. Geoghegan compared these countries to the civet, a carnivorous mammal that eats and processes coffee cherries to then dispose them in a transformed coffee bean that is considered very valuable and sells at high market prices.

What being part of this group implies

The economies that are part of this group are considered to be very promising because they have reasonably sophisticated financial systems, controlled inflation, and a soaring young population.

Michael Geoghegan calls these countries “the new BRICS” because of the potential that they have as second generation emerging economies . He says that “emerging markets will grow three times as fast as developed countries this year [2010]”. To this, he adds the fact that the center of gravity of the world is moving towards the East and the South (Asia and Latin America).

Apart from CIVETS as attractive markets, recent analysis is also addressing their role in the global governance, especially at the G20, where Indonesia, South Africa and Turkey are members. In the development agenda, CIVETS are already perceived as "development providers investing in peer-to-peer learning and horizontal partnerships and (...) are bound to become strategic players at the G20, UN and IFI levels". [6] In this line, during the 2011 Annual Meetings of the International Monetary Fund and the World Bank, the Ministers of Economy and Finance of CIVETS countries established a formal mechanism for communication and coordination.[7]

All of these countries are also 'Next Eleven' countries, except Colombia and South Africa.


All of these countries share the fact that they have a great variety of exports, their economies are mostly made up of primary products and natural resources, they have geostrategic locations, in the past five years foreign direct investment has considerably increased, and some say that in the next twenty years they may be above G-7 countries. According to The Economist’s Intelligence Unit, CIVETS will have healthy yearly growth rates of 4.9% for the next twenty years, while G-7 countries are predicted to have only 1.8% yearly growth rates.

Exchange Traded Fund (ETF)

ETF data as at December 28, 2010:[8]

Colombia: GXG, up 49.07%,
Indonesia: IDX, up 40.04%,
Vietnam: VNM, up 1.52%,
Egypt: EGPT, up 4.85% in 13 weeks, because of new fund,
Turkey: TUR, up 26.63%,
South Africa: EZA, up 31.80%
[edit] ChallengesAll of these countries also share similar challenges: unemployment, corruption, and inequality are persistent problems in most of the countries of the group.

Colombia: The context in Colombia is very special. Colombia has had seemingly never ending war with terrorist groups that tamper with the country's stability.

There are policies that favor the creation of businesses and foreigners can integrate to this market without any major hurdle.[9] As rightist candidate Juan Manuel Santos takes office it is assured that the country will continue the policies that begun with Álvaro Uribe.

Foreign investment has increased in 250% and an oil boom, the country is planning on how to avoid the Dutch disease as billions of dollars enter the country. Colombia's 46 million people and $330 billion GDP make it a promising market.

The country has a budget deficit of 3.6% which is reasonable according to The Economist. Inflation rate is 2.6% and external debt a modest 47% of GDP. As foreign money floods the country, infrastructure is currently improving dramatically in the South American country.

Indonesia: As Robert Hsu states it: "Overall, I think the hands-down best and most timely CIVETS play right now is Indonesia.

After emerging as the third fastest-growing member of the G20 in 2009, Indonesia has been a strong performer. Last year Indonesia expanded at an impressive rate of 4.4% — especially considering the economic landscape.

Like China and India, Indonesia is also expanding rapidly, and investment growth in 2009 was boosted by infrastructure spending and high commodity prices.

With 243 million people and a GDP $ 521billion, it's a substantive-enough economy to invest in. The budget deficit is a reasonable 2.1% of GDP, and the current account is in surplus.[14]

Vietnam: Vietnam as one of ASEAN nation may cease to be a low income economy as GDP per Capita reaches an estimated $1,200 in 2010 (or the worst case in 2011).

Egypt: The World Bank, as of September 2011, is predicting growth of just 1% this year, compared with 5.2% last year — but analysts expect it to regain its growth trajectory when political stability returns. Egypt's has many assets including fast-growing ports on the Mediterranean and Red Sea linked by the Suez Canal and its vast untapped natural-gas resources. Egypt's 82 million population has a median age of 25.

Turkey: Turkey has the world's 15th largest GDP-PPP[17] and 17th largest Nominal GDP.[18] The country is a founding member of the OECD (1961) and the G-20 major economies (1999). Since December 31, 1995, Turkey has been a part of the EU Customs Union. Mean wages were $8.71 per manhour in 2009. Turkey grew at an average rate of 7.5 percent between 2002 and 2006, faster than any other OECD countries. Istanbul, Turkey's financial capital, is fourth in the world behind Tokyo, New York and London.[19]

The CIA classifies Turkey as a developed country. Turkey is often classified as a newly industrialized country by economists and political scientists.

South Africa
Colombian president heads Civets nations to drum up trade with Britain

When President Juan Manuel Santos of Colombia begins an official visit to Britain tomorrow he will be here as the leader of one of the Civets nations – a term coined by the Economist Intelligence Unit in 2009 to refer to the group of emerging economic nations ranked second in importance to the Bric countries. The Civets are made up of Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa – though the latter have also attached themselves to the end of the Bric acronym.

The mark of a Civets nation is a diverse economy and a young, growing population. Michael Geoghegan, chief executive of HSBC referred to these countries as "the new Brics". Geoghegan first used the term publicly during a speech to the Hong Kong chamber of commerce last year when he said "these emerging markets will grow three times as fast as developed countries this year".

The Economist Intelligence Unit predicts growth rates of 4.9% for Civets countries over the next 20 years compared with 1.8% for G7 countries. To signal their arrival as potentially lucrative markets, HSBC launched the first asset management fund directed at these countries this year. So, a year after Brazil, Russia, India and China were dubbed the Bric countries, there's a new acronym on the block.

It is in this context that President Santos comes to Britain – to rebrand the near-failed state of 10 years ago as one of the shiniest emergent economic powers in Latin America.

The statistics certainly bear this out. GDP has doubled in the last 10 years, a decade that has seen marked improvements in the country's security following the success of Plan Colombia in routing most, if not all, the narcotics and political guerrillas to the remotest parts of the country.

The transformation is probably most marked in Medellín. Once synonymous with drug cartels and routinely described as the most violent city in the world 20 years ago, it is now one of the most important economic centres in the reborn Colombia, where a new generation of industrialists and entrepreneurs is bringing change to a city scarred by terror for so long.

This is the story that Santos will be coming to tell, as he revealed to the Observer in a recent interview in Bogotá. "Part of my foreign policy objective is to enlarge and in a way change the traditional agenda that Colombia has had for years or decades. Our agenda was drug-trafficking, human rights violations, kidnappings and all the bad press we had for many, many years.

"But we are living a new reality and part of my responsibility is to have this new reality known by the world. For example in my visit I'm going to put a tremendous emphasis on education, transfer of technology, economic themes in general, and violence and drug-trafficking are going to be marginal. This is a major change for us."

All the basic indices are moving in the right direction, and inward investment is starting to return after years of upheaval. In particular American investors have flooded back in such numbers that questions are being raised as to whether this inward investment might hamper homegrown entrepreneurs and producers.

The Colombian economy is a highly diverse one, but two of its sectors in particular have benefited most from the success of Plan Colombia in clearing large tracts of the country of narcotics or terrorist guerrillas. Large areas of land have opened up for agriculture and mineral extraction after years of being off-limits. As Santos says: "There's a tremendous potential in the agri-business. We have almost half of Colombian land as it was in the wild west in the United States before it was conquered."

The opportunities for UK investment go beyond agriculture, says Santos. "We have the need to upgrade our infrastructure and we need good investment not only in roads but also in ports, in airports and in computer technology, broadband, in all those areas we need investment and we need technology and the UK has it.

"My message is a very simple one. Colombia is considered a rising star. We are doing very well economically, we are almost 50 million consumers. We need investment. We need technology.

"Colombia has many of the things the UK needs and the UK has many of the things that Colombia needs and so there is a tremendous opportunity. We are playing an important role in the region, a region which is also looked at as a region with tremendous future.

"We have energy, we have biodiversity, we have water, we have the possibility of food production, we have a lot of mineral resources. So there's a tremendous potential and I want to attract British investors and British businessmen because I think it would be a win-win situation."

It is a mark of the visit's importance that while Santos will spend most of his time selling his country to the British business community, he will also hold meetings with all the main political leaders and be received by the Queen. For Santos this is principally a professional visit but London is also a place that is dear to his heart. He is no stranger to the city: he lived there for many years while studying at the London School of Economics and working as chief of the Colombian delegation at the International Coffee Executive.

One of the big challenges for the country will be to build an infrastructure that can exploit its growth potential. Anyone who has journeyed outside the main Colombian routes will testify to how basic some of the roads are. This is a country with significant natural resources – and nine major rivers – but these natural gifts also present enormous challenges, not least how best to navigate the three Andean mountain ranges that run almost the length of the heavily populated western regions.

As the Economist noted last month, "Across the country the 'monumental backwardness' of Colombia's transport network – as Juan Martin, president of the Colombian Infrastructure Chamber, puts it – is perhaps the biggest obstacle to economic growth."

And that is where British business may have a role to play. Santos has just announced a 10-year, £30bn investment plan to upgrade Colombia's infrastructure. Santos is looking for private partners to help realise this ambitious project – he has already announced plans to open tenders for £1.9bn worth of projects by the end of the year. It is these kinds of investment opportunities that Santos will be selling to the City of London this week.

The benefits of economic growth are plain enough for any country, but for Colombia it is also seen as a necessary step in escaping the kind of inequality and social injustice that sparked the Farc guerilla movement into life in the mid-1960s and which has plagued the development of the country ever since.

Santos believes the benefits of improved economic performance for Colombia will be measured in much more than rising GDP or falling unemployment. "We're doing very well economically. We want to have the best practices in terms of education, in terms of health, in terms of fighting against corruption, but at the same time we have tremendous inequalities and we have extreme poverty and lots of people in Colombia are poor. And if we don't solve that problem the rest will be difficult to sustain."

Source: The Guardian.
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