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How to invest in Civets

FEATURE: Moira O'Neill looks at the investment case for each of the Civets - Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa - and how to invest in them.

Colombia

Dean Newman, head of emerging market equities at Invesco Perpetual, puts Colombia alongside Brazil in offering the most stable economic and political frameworks in Latin America. The catalyst for change in Colombia has been the much improved security situation in the last eight years, during President Uribe's term of office. Mr Newman expects that improved situation to be maintained under his successor.

How to invest: There are no UK-listed ETFs with direct exposure to Colombia and Lyxor's MSCI EM Latin America ETF only has 3 per cent exposure to Colombia. However, two US-listed products are available: Market Vectors Colombia ETF (COLX) and Global X FTSE Colombia 20 ETF (GXG). You might also be able to get access via an actively managed Latin America fund but a quick trawl through these revealed that they have very little – and more often no – exposure to Colombia. Ones that have very small exposures to Colombia include BlackRock Latin American Investment Trust and Invesco Perpetual Latin America Fund.

Indonesia

Indonesia is the most similar to the Brics, owing to its very large population of 245m (bigger than Brazil or Russia). In December 2010, the government articulated an economic vision in which Indonesia would grow to become one of the world's 10 largest economies by 2025. If it succeeds in this objective, investing in Indonesian assets early on could prove to be very rewarding. The long-term outlook for Indonesia is supported by a powerful mix of favourable demographic factors, including a large population dominated by young people whose disposable incomes are rising,

How to invest: You can get passive access via the MSCI Indonesia TRN Index ETF.

Bric prospects

Last year, Goldman Sachs predicted that China might surpass the US in equity market capitalisation terms by 2030, making it the largest equity market in the world. By 2020, US GDP might be only slightly larger than China's and together the four Brics might account for 41 per cent of the world's market capitalisation by 2030, the report said.

But the rise of the Brics may happen more quickly – in April 2011 the International Monetary Fund predicted that the Chinese economy would grow from $11.2 trillion in 2011 to $19 trillion in 2016, compared with $15.2 trillion and $18.8 trillion for the US economy.

Michael Konstantinov, fund manager of the Allianz RCM BRIC Stars Fund, says: "The Bric economies are continuing their growth path despite the turbulence in the developed world. The most important growth driver for the Brics is domestic demand. This decade is going to be the decade of the Bric consumer and the global economic balance will shift towards emerging markets and especially the Brics."

Vietnam

Vietnam produces and exports a wide range of primary commodities and manufactured goods, including oil and gas, rice, coffee, seafood, garments, footwear, electronics, handicrafts and pharmaceuticals. In addition, tourism, telecommunications, construction, infrastructure development, trade, transportation, finance and other services are increasingly contributing to the growth of the economy. With a large, young, highly educated and dynamic population determined to continue to reap the benefits of the type of progress that has delivered a decade of gross domestic product growth averaging in excess of 7 per cent, the Vietnam success story is still in its opening chapters.

How to invest: You can get passive access via the FTSE Vietnam Index ETF, or actively managed access via the PXP Vietnam Fund.

Egypt

The uprising in Egypt that ended the 30-year rule of President Hosni Mubarak brought the country's economy to a halt and led to the closure of the Cairo stock exchange and severely dented investor sentiment. However, in the longer term Egypt is one of the most attractive frontier markets, with a compelling investment case. It has a young population, a favourable geographic location and many of its companies boast strong fundamentals and a number are global players. Plus, Egypt has a rich supply of natural resources such as gold, oil and gas which are hard currency earners for the country.

How to invest: Via an actively managed frontier markets fund (see box below).

Actively managed funds

■ The Dublin-domiciled Coronation Africa Fund has 33.5 per cent in South Africa and 15.5 per cent in Egypt. However, the minimum investment is $15,000, which might pose a problem for some investors (www.coronation.com).

■ The Luxembourg-domiciled Investec Africa and Middle East Fund has 5.4 per cent invested in South Africa, 5.1 per cent in Egypt and 4.4 per cent in Turkey but it still has 40 per cent in cash and estimates a very hefty total expense ratio of 3.34 per cent (www.investecassetmanagement.com).

■ Investec Africa Opportunities fund, launched in September last year and managed by Malcolm Gray, is designed to provide an entry point for investors looking to benefit from the long-term growth potential of Africa, and has around 30 per cent of its investments in South Africa, although this can be as much as 75 per cent.

■ Your best bet is probably the Fidelity Emerging Europe, Middle East and Africa fund, which has 42 per cent in South Africa and 6.5 per cent in Turkey. Over one year (to 31 March 2011) it has returned 10.6 per cent and over three years 48.5 per cent. It also has a reasonable TER of 1.81 per cent.

Turkey

The Turkish economy has bounced back strongly since the global downturn, growing by an estimated 8.1 per cent in 2010. The country is now reaping the benefits of the reforms and policies it pursued after its own crisis of 2001: its banking system survived the global crisis in relatively good condition and the government's budgetary and public debt position is significantly better than many countries in the eurozone.

An important driver of structural reforms has been Turkey's EU accession process, which has paved the way for comprehensive changes, including the increasing role of the private sector, the enhanced efficiency and resiliency of the financial sector and a more solid social security system.

How to invest: Via the iShares Turkey ETF or an actively managed frontier markets fund (see box above).

South Africa

For several years fund managers have been promoting Africa as the next frontier of untapped investment opportunity. The country has emerging market and developed market characteristics. Foreign direct investment in South Africa is steadily increasing as the government encourages more international companies to set up shop. Bu the mining sector remains dominant as South Africa enjoys a large reserve of natural resources.

How to invest: iShares MSCI South Africa ETF or an actively managed frontier markets fund (see box above).

The 'Mints'

Fund manager Fidelity argues that the Mints (Mexico, Indonesia, Nigeria and Turkey) offer the next big opportunity for investors, with the potential to be as rewarding for investors over the next 10 years as Brics have been in the past 10. We have already looked at Turkey and Indonesia, but the prospects for Mexico and Nigeria are below:

Mexico: Both a potential strength and weakness of the country is its very high economic exposure to the dominant US economy. Around 80 per cent of Mexico’s exports go to the US and, as well as receiving substantial amounts of US investment, Mexico also benefits from the remittances of the large Mexican-origin community that resides in the US. Alex Duffy, co-manager of Fidelity's Latin America fund, says: "Five years ago, the labour cost of a Mexican worker was 260 per cent more expensive than a Chinese worker. That premium has steadily eroded over time and, after a lull in the early part of this century, Mexican goods are once again taking an increasingly larger percentage of imports into the US."

Nigeria: Nigeria is home to Africa's largest population and is a country richly endowed with natural resources, which is helping to boost investment trade flows and economic growth. The banks in Nigeria are now highly regulated and well capitalised.

However, Nigeria is still a nascent equity market and relatively illiquid. From a political perspective, the country has experienced periods of social unrest in the past. However, the outcome of the recent elections has been positive for the continuation of reforms put in place by re-elected president Goodluck Jonathan.