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Move over Brics

FEATURE: The Brics have had a great run, but now it's time to look to second-generation emerging markets, says Moira O'Neill

Back in 2003, Goldman Sachs coined the term Brics to collectively describe Brazil, Russia, India and China and investors in these countries have enjoyed excellent returns over the past 10 years. This may continue, but many investors are now keen to go beyond the Brics.

There are a number of genuine emerging market opportunities that are not as well appreciated but have similar long-term investment potential. For example, in 2005, Goldman Sachs published a paper on the 'Next Eleven' countries (or N-11) – Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam. The criteria that the investment bank used for the N-11 were macroeconomic stability, political maturity, openness of trade and investment policies and the quality of education. Most recently, investment house Fidelity has been promoting the 'Mints' – Mexico, Indonesia, Nigeria and Turkey ().

But the post-Bric acronym that seems to be gaining most ground is Civets, which refers to Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa and is named after the cat-like animals found in some of these countries. Invented in late 2009 by Robert Ward, global forecasting director for the Economist Intelligence Unit and taken up last year by former HSBC chief executive Michael Geoghegan, Civets have a decent pedigree. "Each has a very bright future," Mr Geoghegan said of the Civets, in April 2010. "Each has a large, young, growing population. Each has a diverse and dynamic economy. And each, in relative terms, is politically stable." He even called them "the new Brics" because of the potential that they have as second-generation emerging economies.

According to the Economist Intelligence Unit, Civets will have healthy yearly growth rates of 4.9 per cent for the next 20 years, while G-7 countries are predicted to have only 1.8 per cent yearly growth rates.

At the start of May 2011, Standard & Poor's (S&P) confirmed Civets' pre-eminence by launching the S&P Civets 60, a tradeable index of 60 stocks (10 from each of those markets). As of 31 March 2011, South Africa represented 32 per cent of the index, followed by Indonesia (28 per cent), Turkey (21 per cent), Colombia (12 per cent), Egypt (6 per cent) and Vietnam (1 per cent).

According to S&P, the Civets countries have a total population of over 580m, and share some key characteristics: their economies are relatively diversified, not overly reliant on natural resources and with increasing foreign direct investment. But is that stretching a point? South Africa has long been an economy driven by its natural resources. Oil-rich Colombia and Indonesia are hardly lacking in minerals. Egypt is not currently seeing "increasing foreign direct investment".

The similarities between the Civets aren't always obvious. Vietnam is a communist dictatorship, Egypt is an authoritarian state in a reform phase, while Turkey is a democracy of good enough standing to be negotiating European Union membership. And, of course, all emerging markets investors need to consider the associated risk factors. Recent instability in the Middle East and North Africa has highlighted the political risk, in particular. The task therefore is to find those countries and assets within these that offer sufficiently high returns to compensate for the level of risk.

As well as being risky markets, the Civets are difficult to access for direct investors. The easiest way into them is via funds. We don't yet have a dedicated Civets fund, although the launch of the S&P index may form the basis for one soon. However, exchange-traded funds (ETFs) offer a way to access some of the Civets individually. Plus there are plenty of actively managed funds that offer exposure to these regions.