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Knowing Your BRICs and CIVETS

December 21, 2010


As emerging market countries increase in importance with regards to the global economy, identifying them has become an interesting game of acronyms. First there were the BRIC countries (Brazil, Russia, India and China). They were joined by the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa). Then Indonesia got promoted into the BRICI (I suppose that left the C-VETS with new acronym). My guess is that all aspiring emerging market countries want their nation represented by a letter in an acronym because it would be an honor that identifies them as up-and-coming economic powerhouse — a place where investors should look to get a good return on investment.


The Financial Times has paid a lot of attention to emerging market countries over the past couple of years. One reason is because they have fared better coming out of the global recession than most developed countries. In one article, for example, Steve Johnson discusses how the CIVETS are vying to compete with the BRICs [“Next 11 and Civets vie to be Next Bric Thing,” 13 September 2010]. Johnson openly ponders whether there is there “any merit in either of [the] two new acronyms” and discusses the emergence of a new group the “Next 11.” He writes:

“To many, civets are best known for the unusual, but essential, role they play in producing the world’s most expensive coffee. But to emerging market aficionados, Civets is the acronym for Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. As such, it aims to identify the next wave of nations likely to follow the much-celebrated Bric quartet of Brazil, Russia, India and China on to the world stage. However, it is a rival grouping, the Next 11, that appears to be nudging ahead in the race for recognition. Next 11 has the kudos of being coined by Jim O’Neill, chief economist at Goldman Sachs, who came up with Brics in 2001.”

Although members of the Next 11 are undoubtedly thrilled at the recognition, surely they are a bit disappointed about failing to make it into an acronym of their own (or, in the case of the CIVETS, to lose that honor). So what countries constitute the Next 11? Johnson tells us that the countries are: South Korea, Mexico, Indonesia, Turkey, the Philippines, Egypt, Vietnam, Pakistan, Nigeria, Bangladesh and Iran. He continues:

“‘The Bric concept was a great success. It worked as an academic concept and as an investment. Bric returns have outperformed almost any other equity product since the concept was termed,’ says Arrash Zafari, the manager of the new Castlestone fund. ‘We think the Next 11 gives investors another shot at the concept. I see the Next 11 as being a collection of mini-Indias.’ Mr Zafari argues that the Next 11 offer opportunities no longer available in the Bric nations. … ‘If you go back 10 years you could have got the same opportunities in the Brics. Now there are a lot of funds locked into Bric markets. You have an enormous number of brokers looking at China, India. Who looks at Next 11 countries?’ he asks. However, Mr O’Neill freely admits there was ‘no great science’ behind the creation of the Next 11 universe – he simply listed the 11 most populous emerging markets after the Brics. ‘The whole Next 11 thing was really just a notion to respond to the never-ending questions about why these four [the Bric countries], why not Indonesia, Turkey, Mexico?’ he says. ‘It was never intended to be anything like the Bric thing. I regarded the Brics as four integral parts of the world economy. I wouldn’t say the same about all the Next 11 countries.'”

The reason that O’Neill concentrated on “the 11 most populous emerging markets” is that it will be the emerging global middle class that will power global economic growth. The more populous the country the more potentially powerful it can become. Johnson continues:

“Mr O’Neill says latecomers have not missed the Brics boat. ‘We are entering the beginning of a phase; the Bric consumer. China has overtaken the US to become the biggest car market in the world but sales are only a fifth of where I think they are going to go, and eventually Indian car sales will overtake those of China.'”

Johnson points out that the Next 11 is actually a rival concept to CIVETS — a name which was coined by “Michael Geoghegan, chief executive of HSBC.” If you aren’t confused enough by the acronyms already in play, Johnson indicates that more are on the way. He explains:

“Jerome Booth, head of research at Ashmore Investment Management, [has] created the acronym Cement – Countries in Emerging Markets Excluded by New Terminology – arguing ‘if you want to build a wall, you need both Brics and Cement’. ‘I have never understood why anybody should just invest in 11 countries or four countries. It has never made any sense to me. People should diversify,’ he says. Mr Booth does concede the Brics concept has been effective in helping retail investors ‘get their head around’ emerging market investing.”

For my taste, “BRICs and Cement” is just a bit too cute; but the concept behind identifying countries on the brink of joining the developed world is important. As I noted above, investors want to know where they are likely to get a good return on investment. The most important type of investment for emerging market countries is foreign direct investment (FDI) because FDI is not as liquid as equity investments. That doesn’t mean, however, that equity investments are not important. David Oakley indicated that equity funds in emerging nations soared while the developed world was mired in recession [“Big shift benefits emerging markets,” Financial Times, 24 October 2009]. He reported:

“[In 2009], investors … switched money out of developed world equities and into emerging market stocks in a dramatic shift in fund flows. While emerging market equity fund inflows have surged to all-time highs, developed world stocks have seen record outflows. This is because of strong data in the developing world and a growing view among investors that these markets are likely to offer the biggest returns as their economic growth outpaces the west.” … Equity fund inflows into the Brics – Brazil, Russia, India and China – … soared to a record $32.3bn [in 2009], already nearly $10bn more than the previous high of $23.6 in inflows in 2006.”

A year on from Oakley’s report, there are mixed views of how things stand in emerging markets. Jerome Booth, Head of Research at Ashmore Investment Management, calls emerging markets “a beacon of opportunity” [“Emerging nations: a beacon of opportunity,” Financial Times, 25 October 2010], while David Bonderman, co-founder of private equity firm TPG Capital, “has warned of an emerging markets ‘crisis of expectation'” [“Bonderman warns over emerging markets,” by Henny Sender, Financial Times, 11 November 2010]. Booth writes:

“If you are looking for a market bubble do not look to emerging markets. The US and Europe remain a huge super-bubble. Emerging markets, by contrast, are safe. Putting one’s head in the sand and denying this reality has the attraction of plentiful company, but constitutes the opposite of prudence. Remember, lemmings also like to crowd together and the collective name for them is a ‘suicide’. Unlike Europe and the US, emerging markets do not have a credit crunch, in essence a multi-year, very painful, deleveraging – that is, wealth destruction. But if you have not experienced 30 years of rising financial leverage, the past 10 to excess, you cannot get a credit crunch. Emerging markets are in a very different cycle to the developed world now, with inflationary not deflationary pressures.”

Bonderman, on the other hand, insists, “There will be dislocations. Emerging markets are volatile. At some point there will be despair just as there is euphoria now.” Obviously, both analysts can’t be right. The one thing they seem to agree on is that emerging market equity markets can be volatile and risky. Managed correctly, however, the economies of emerging market countries could see the continued emergence of a global middle class (i.e., new consumers) who will fuel economic growth. Elizabeth Rigby reports that “the relative importance of the West’s shoppers is declining” [“Consumption starts to shift to China, India and Brazil,” Financial Times, 21 April 2010]. She continues:

“While demand has been sluggish in the developed world, emerging markets – in particular China, India and Brazil – are telling a very different story, with consumer spending still buoyant. … In the longer term, [Ira Kalish, director of global economics at Deloitte Research], thinks the US consumer is in decline, as the pattern of spending around the world shifts away from the US and Europe to China, India and Brazil. Americans, who re-mortgaged their houses to fund a spending boom – half the growth of consumer spending over the past decade has come from people extracting cash from their homes – no longer have credit so readily available. This means, says Mr Kalish, that spending in the US, which currently accounts for 72 per cent of gross domestic product, should move back to its historical level of 66 per cent. That is why the biggest US and European chains – Wal-Mart, Metro, Carrefour, Hennes & Mauritz, Tesco and Bestbuy – must push for growth in developing markets.”

Whether new consumers come from a BRIC, BRICI, CIVETS, Next 11, or CEMENT country, they are becoming important factors in global economic growth. In the end, it is not the acronym but the individual consumer in an emerging global middle class that matters.

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