If one word sums up the growing realization that one size does not fit all emerging markets, it’s this: “Crimea.” Most investors have long viewed the BRIC nations (Brazil, Russia, India and China) as a proxy for emerging economies — or what more accurately should be called growth markets. In the past year, however, question marks over each of these markets have chipped away at the notion that acronym-based investing is a sound strategy.
Russia’s annexation of Crimea is arguably the final crack in that BRIC wall. Although growth was slowing before Russian special forces swooped in, sanctions and the potential impact of the Ukraine crisis on Russia’s oil and gas exports have sent investors fleeing. The Micex Index of Russian equities was down nearly 9 percent this year as of May 12, and Standard & Poor’s in late April cut its rating on Russian debt to BBB-, citing a risk of further capital outflows. Investing in this BRIC is a risky option at best.
The same holds true, for different reasons and to varying degrees, for the other members of this artificial club. After two decades of strong growth driven by natural-resource development, demographic dividends, government spending and other advantages, all the BRIC nations are showing signs of age or confronting structural challenges. Brazil faces budgetary and political issues as it prepares for the World Cup; suffocating bureaucracy and glacial decision-making plague India’s economy; concerns about shadow banking and the structure of the economy cloud the outlook in China. Combine these domestic issues with the side effects of shrinking U.S. monetary stimulus, and it’s no wonder that investors have begun to hedge their bets on these economies.
Away from the BRICs, we see strong opportunities for investors in a wide spectrum of growth markets across Africa, Asia, Latin America and the Middle East that are achieving above-average economic expansion. Growth in these countries is invariably strongest in industries that are closest to increasing populations of young, urban consumers with rising disposable incomes, notably what I call the sturdy seven: food, health care, education, financial services, consumer products, logistics and retail operations. Companies active in these sectors are mostly unaffected by broader macro shocks.
Take Turkey, where despite recent political troubles an additional 7.5 million households are on track to exceed $20,000 a year in income by the end of this decade. As a result, consumption of drinking yogurt grew 20 percent there last year. The number of shopping malls and sales at bakeries have each grown at double-digit rates for the past decade. When the country’s central bank jacked up interest rates in January, Turkish markets reeled, but that did not change the amount of pide (flat bread) or ayran (a popular yogurt beverage) consumed by Istanbul’s swelling middle class.
This same trend explains why the earnings of well-run companies in southwest Nigeria have continued to expand despite the sectarian violence in the north, underscored by the recent kidnapping of hundreds of schoolgirls by Islamist militants. People in Lagos, where per capita consumption is more than twice the national average, still want better goods and services for their families, even as posturing begins for elections in 2015.
These dynamics underscore why certain growth markets will continue to provide attractive opportunities for investors focused on long-term fundamentals. After all, an increase in a consumer’s spending power from $1 to $2 a day may not sound like much, but it represents a doubling of disposable income that more advanced nations can only envy.
On the other hand, growth driven by foreign capital, natural resources and government spending will always be volatile, something investors in BRIC know all too well today. Foreign capital is famously skittish, especially during periods of political turmoil; resource prices can sway wildly; government can take away just as surely as it gives. But growth based on rising incomes and household spending power is enduring and immune from classic contagion — a diabetic in Cairo will not skip a blood sugar test because of political protests in Thailand.
Of course, investing in these growth markets comes with risks. A local perspective is essential to navigating the business landscape and mitigating the biggest danger for many investors — counterparty risk. Even so, many growth markets are more stable and primed for development than the BRIC nations were just ten or 15 years ago. Investors seeking real, sustainable returns will best be served by focusing on economies where strong institutions, vibrant business communities, demographic fundamentals, domestic demand and regional connectivity will help ensure they remain growth markets well into the future. • •
Arif Naqvi is founder and group CEO of Abraaj Group, a global private equity firm focused on growth markets.
