Tuesday, 23 February 2016

MINT - The new BRIC

Economist Jim O’Neill will forever be associated with the term BRIC, which he coined as an acronym for Brazil, Russia, India and China (now including South Africa to make BRICS). Now there is a new one: the MINT countries.

Mint? This term refers to Mexico, Indonesia, Nigeria and Turkey. They are bound by a few key themes: young populations, useful geographical placement, and (Turkey excepted) big commodity producers that should make these big economic powerhouses.

Personally I have mixed feelings about the MINTs, and also think that any use of this idea as an investment theme ought to take into account just what’s happened to the BRICS in recent years.
The good news. Mexico and Nigeria have some of the best prospects in all emerging markets. Nigeria, in particular, is thought to be in an economic sweet spot and has gathered increasing attention from world investors over the last year. It will soon prove to be the biggest economy in Africa, bigger even than South Africa. Even without reform GDP has grown by 7% a year since 2000. There are considerable challenges, from corruption to theft of natural resources, but Nigeria is a high-population market of growing wealth and opportunity.

Mexico, too, is increasingly the Latin American market that investors like most. It is increasingly common for investors to say they like Mexico “because it isn’t Brazil”, and although that remark is naturally a bit flippant, there is some truth in it: whereas Brazilian companies have tended to be sluggish and mired in state policy, Mexico’s benefit from market-friendly reforms and a sense of national momentum under President Enrique Pena Nieto, expected to attract steady increases in foreign investment.

The thing about Indonesia and Turkey, though, is that they are both the market darlings of about two years ago. Back then, Indonesia was much the most adored market in Asia by both debt and equity investors: a country that had made the successful transition from military dictatorship to democracy, and which had elected a stable and admired government; a very strong domestic demand story which insulated it from the global financial crisis; a young demographic; and plentiful supplies of coal at a time when China’s need for fuel had never been greater. But several things have since gone wrong. The fiscal picture has been damaged by twin deficits, the currency has fallen, concerns have grown about foreign outflows from the country and there has been disappointing progress in infrastructure development.

Then there’s Turkey. In November, the IMF put out a report on Turkey saying that it “can only sustain high growth at the expense of growing external imbalances.” It called for a mighty 250 basis point rate hike in the key policy rate, one of the most aggressive IMF reports in memory. Turkey’s inflation rate is close to 8%, and it also faces deficit problems and a weakening currency. There are some who think there is a meltdown coming in Turkey.

One point about these countries is their location: Indonesia as the heart of Southeast Asia, Mexico benefiting from proximity to the USA, Turkey with its combination of eastern and western attributes, and Nigeria as the most buoyant illustration of a rising African continent. It’s true that these locations do have a likely positive impact on trade.

Overall the outlook for these countries is very strong – but it could be 2030 before we see their strengths truly emerge so a long term view is definitely required. As always you should assess the suitability of any investments according to your risk preference and overall long term goals.

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