Another BRIC in the wall

December, 2012 Print



Ciarán Henry


Institutional Business Development AGF


As the United States and Eurozone superpowers struggle to right themselves financially, emerging markets (EM) have been a key source of growth for the global economy in recent years (Figure 1). But even these markets have not been immune to weakness. While the long-term outlook for these emerging markets is encouraging – supported by positive macroeconomic fundamentals, including rising domestic consumption and infrastructure spending – EM investors have had their confidence tested recently. The current reality of muted global growth, volatility and uncertainty is likely to continue due to ongoing deleveraging in the developed world and financial problems in Europe. However, rising domestic consumption in EM economies will likely help offset this to some extent.





According to the July 2012 IMF World Economic Outlook Update, imports have continued to grow at a faster pace in emerging economies than in developed economies (8.8% versus 4.4%, respectively) in 2011, and this is projected to continue into 2013. Additionally, wage increases in EM countries – such as South Africa, which had an average annual wage growth of 7% for the five-year period from 2006 to 2011 – point to rising consumption trends.


But while import and consumption trends are strong in many EM countries, the more familiar BRIC contingent (Brazil, Russia, India and China), long touted as the next generation of powerhouse economies, is experiencing a slowdown. India is facing fiscal and trade deficits that are not likely to be resolved quickly, and political paralysis has put many infrastructure projects on hold. For example, in 2010, the National Highways Authority of India cancelled the Goa road project because of its inability to acquire land for the project due to lack of land reform.

China, following a massive injection of liquidity during the post-financial crisis period, is attempting to address imbalances arising from capital misallocation at the private and local state levels by providing more targeted support to domestic growth in areas such as the auto sector. Growth rates in China and India slowed considerably in 2011 and are expected to continue to decelerate in 2012, albeit at a slower pace (Figure 2). In stark contrast, some peripheral economies within the EM contingent are demonstrating a new-found resilience as governments implement structural changes to stimulate internal growth. Despite the global slowdown in growth, South Africa’s change in growth was only marginally affected in 2011 and 2012, according to the July 2012 IMF World Economic Outlook Update (Figure 2).

This variance in the deceleration of growth across the EM economies highlights the importance of why institutional investors should look beyond BRIC to bolster their portfolios. Others to watch on the EM stage include South Africa, Mexico, Thailand and South Korea. These countries in particular have exhibited positive domestic economic fundamentals, rising consumption trends, healthy savings rates and sound financial institutions. They are also highly competitive internationally, enabling them to thrive in the global economy.

South Africa

South Africa’s economy has experienced dramatic growth and transformation since policy-makers began implementing a series of reforms in 2004. In addition to benefiting from reforms to control inflation and stabilise public finances, the country has also gained from the rising global demand for commodities.

The resulting improvement in employment conditions has attracted foreign direct capital investment (Figure 3). Net foreign reserves (which include gold and currency) have continued to expand, reaching all-time highs of approximately US$50 billion in February 2012.

The region’s financial institutions have been extending more credit to relatively good-quality borrowers. This growing wealth effect among South African consumers bodes well for retail spending, which has grown significantly in the last few years, and grew by 6.4% on a year-on-year basis in May. For example, Woolworths Holdings Ltd, which operates a food and clothing business in more than 400 retail stores, is poised to take advantage of the increase in consumer spending. The positive domestic fundamentals position the firm to grow its gross sales and operating margins.


Mexico has recently had its many positive economic attributes overshadowed by headline security concerns, and it has learned its lessons from previous crises that nearly caused the country to default on its debts. In recent years, the government has been implementing fiscal discipline and strengthening the banking system (so that it is now fully capitalised and compliant with Basel III, the international regulatory framework for banks to strengthen risk management and the ability to withstand shocks). It has also introduced reforms to enhance competitiveness, such as increasing powers for Mexico’s Federal Competition Commission to combat monopolies and oligopolies.

Over the past decade, government spending on infrastructure, housing and social programs in Mexico has spurred domestic economic growth. Mexico recently refinanced its external debt at lower rates and has accumulated more than US$157 billion in foreign reserves, putting it in a healthy fiscal position (Figure 4). The government’s conservative fiscal policies have also helped strengthen the peso. With steady inflation close to the target rate of 3.5%, Mexico can afford to maintain lower borrowing rates, thus putting money into the hands of consumers to redistribute into the economy.

While wage growth has not been as heated as in other EM countries, Mexico has experienced a similar evolution in consumer affordability and lifestyle changes. One company set to benefit from the rising consumption trends is Mexico’s leading supplier of consumer tissue products – Kimberly-Clark de México – which has a portfolio of leading brands, including Kleenex, Huggies and Kotex. The company has achieved sales growth of 8% year-on-year, and looks to gain market share as it moves into new category segments and distribution channels such as hospitals.
The outlook for Mexico is likely to continue improving, as the domestic sectors benefit from positive consumption and income trends while headwinds from a weak US recovery and European uncertainty gradually ease.


Following a year of devastating floods and widespread destruction to capital and infrastructure, Thailand’s GDP growth could rebound strongly this year because of reconstruction spending injections from private and public institutions. The Thai government has a sound balance sheet, with a debt-to-GDP ratio of approximately 41% (Figure 5), which is lower than most European countries, including that of France and Spain (at 85% and 68%, respectively). Thai listed companies have also been resilient, making a strong rebound across all industries in the first quarter of 2012, according to the Stock Exchange of Thailand.
The country has benefited from China’s growth and intra-regional trade in Asia, but it has also learned from history. The Asian crisis of the late 90s, among other things, shone a light on deficient government and private citizens’ savings levels, underscoring the need for change.

Thailand’s large banks have loyalcustomer bases, and price competitionis limited. With a healthy growth indeposits thanks to rising incomes,Thailand’s third-largest commercialbank, Kasikornbank Public CompanyLtd, maintains a portfolio balancedbetween corporate and retail banking,and boasts one of the highest loanyields and spreads of any of the largeThai banks. The positive marketfundamentals and declining pressureson operating expenses should enablethe company to generate even higherprofits.

South Korea

Dubbed one of the Four Asian Tigers,South Korea has been one of theworld’s fastest-growing economiessince the early 60s and is one of themost industrialised members of theOrganisation for Economic Cooperationand Development. In 2011,South Korea’s GDP per capita was morethan US$16,500, exceeding that ofSpain, Greece and Portugal (Figure 6).As a heavily trade-dependent nation(South Korea ranks among the top 10in terms of exports and imports in theworld, according to estimates from theCIA’s 2011 The World Factbook), thecountry boasts companies that havedominated their home market andevolved into highly competitivebusinesses now set to compete on theglobal stage.

A perfect example is global giantSamsung Electronics, which hasconquered the consumer electronicsmarket in Asia and is a formidablecompetitor against Apple in the fastgrowingsmartphone and tabletmarket. According to a July 2012article in Business Insider, in Q2 2011,Samsung shipped 20.2 million units ofsmart phones. By Q2 2012, the unitsshipped had grown to 50.5 million,representing an increase in globalsmart phone vendor market share from18% to 35%. In comparison, Appleshipped 20.3 million units in Q2 2011and 26 million units in Q2 2012; itsmarket share remained steady ataround 18%.

With opportunities come risks

Emerging markets offer tremendousopportunities, but investors should beaware of their risks. These markets aretypically more volatile than manydeveloped markets. This is partly dueto heightened political and economicrisks, as the countries transition tofree-market economies and implementvarious reforms.

Investors must also consider theinherent risks of investing in marketswith a short track record of foreigninvestment, or investing in relativelyearly-stage companies. This is inaddition to the usual threats of stockprice fluctuations, liquidity,inflationary pressure and localcurrency volatility.

Despite these risks, EM countrieswill likely remain key contributors toglobal growth well into the future. Thehealthy states of sovereign finances,trade balances, savings rates andemployment trends have givengovernments in these countries theability and resources to stimulategrowth at home to offset some of theweaknesses seen globally. Policyreforms should continue to bring aboutstructural improvements andproductivity advancements, whichshould be positive for domesticeconomic growth in the long run.

Investors looking for global growthand willing to consider accepting therisks associated with emerging marketswould do well to invest beyond BRIC –and gain the diversification benefitsconsidered vital to long-term investing.


The commentaries contained herein are provided as a general source of information based on information available as of September 2012 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained herein.

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