By RESHMA KAPADIA
There’s a new acronym in the emerging markets world: MIST, or Mexico, Indonesia, South Korea and Turkey. Will these countries unseat Brazil, Russia, India and China for the most interesting international investments?
It’s natural to wonder if there is any linkage between the countries other than that they make a catchy acronym. After all, some investors don’t even consider South Korea an emerging market. Its gross domestic product per capita, a common measure of wealth, is seven times that of Indonesia. But there is at least one commonality: Strategists say these markets are part of the next group of important emerging-market players bubbling up in the shadow of Brazil, Russia, India, and China—the BRICs.
The recent buzz around the MISTs is undoubtedly driven by concerns surrounding the BRICs. That, and stock performance. While the MSCI BRIC Index is down 2% this year, MSCI Turkey is up 36%. Much of that difference can be chalked up to sector composition, says Kathryn Koch, Goldman Sachs Asset Management senior portfolio strategist. The BRICs, for example, have twice the commodities exposure of the MISTs, but the MISTs have twice the exposure to recent growth in consumer-spending activity.
This dynamic has helped Mexico, but it is favored now because Mexican shares still are attractively valued. The Mexican economy has grown more than expected, helped by exports to the U.S. Mexico is taking back the lead from China in manufactured exports. Labor costs are rising in China, and its economy is shifting more toward consumer spending. With the U.S. recovery, however tepid, offering a bright spot among the major developed markets, Mexico stands to benefit, given its close links to its northern neighbor.
Mexico is seeing its own improvements as well. Nomura economists expect Mexico to grow 3.7% this year, faster than Brazil’s 1.9%. President-elect Enrique Peña-Nieto is expected to usher in a wave of reforms to boost growth once he takes office in December, including a possible change to the constitution that would let the private sector get involved in the oil-and-gas sector. These developments come against a backdrop of relatively controlled inflation.
Of course, those reforms may not go through, taking some of the excitement out of Mexico. If investor sentiment improves notably, it’s also possible more money could flow into beaten-down markets like China. But one reason investors like Mexico is the number of high-quality, cash-rich companies, many of which are oligopolies and enjoy high returns on equity.
Take media giant Grupo Televisa (ticker: TV), which has a stake in Univision. Derrick Irwin, manager of the Wells Fargo Advantage Emerging Markets Equity fund (EMGAX), says low pay-TV penetration means there is still plenty of room for long-term growth. Will Landers, manager of the BlackRock Latin America fund (MDLTX), favors America Movil (AMX), because of the telecom provider’s strong network and strong cash-flow generation. On the smaller end, there is Bolsa Mexicana (BOLSAA.Mexico). The country’s stock exchange gets only 10% of its sales from stocks and has a 4.3% dividend yield.
Despite the Mexican fiesta, Koch says these markets aren’t a replacement for BRICs (the term her colleague Jim O’Neill brought into the lexicon), but rather a complement. Together, the eight countries are expected to make up 60% of global GDP growth over the next decade, which keeps Goldman positive on the four MIST countries over the long run.
This article was published on BARRON’S Magazine.