The Next 11: Are they the next big thing?

Not far behind the well-known BRIC nations, these up-and-comers offer much food for thought

If your clients are familiar with investing in the BRIC countries of Brazil, Russia, India and China, they might be interested in the Next 11, which not only have the potential to become future leaders in the emerging-markets space but are also regarded as the successors to the BRIC nations.

The Next 11 is a varied group with different characteristics and are in different stages of development, says Mark Mobius, executive chairman of Franklin Templeton Investments Corp. ’s emerging-markets group in Singapore.

Adds Bhim Asdhir, president and CEO of Excel Funds Manage-ment Inc. in Mississauga, Ont.: “[These countries] have a long way to go, but they are growing at an average pace that is three times faster than developed countries.”

Arguably, your clients must be willing to assume a greater degree of risk for the opportunity to obtain potentially greater rewards from the Next 11. The group includes the Next 3 subset of South Korea, Turkey and Mexico, as well as Egypt, Indonesia, the Philippines, Bangladesh, Nigeria, Pakistan, Vietnam and Iran.

“Their fundamentals look attractive in the medium and long term,” says Mark Grammer, vice president of investments and portfolio manager with Mackenzie Financial Corp. in Toronto.

Asdhir suggests that now is the time for clients to benefit from the first-mover’s advantage in the Next 11: “If you do not invest now, you’ll miss the boat for the next five years.” He believes that growth in these countries would follow an “S-curve,” which implies accelerating to exponential growth over a certain time frame, followed by a period of stability.

The notion of the Next 11 group of emerging countries was developed by Goldman Sachs Group Inc. in 2005 to identify countries — other than the BRIC nations — that have the potential to rival the G7 as a source of global demand and sustained growth.

A June 2010 Goldman Sachs report notes: “Most are growing strongly relative to the advanced economies, in spite of the global slowdown” and these countries are in a “strong position to capitalize on both market-based and bank-based systems of finance.”

The prospects for the Next 11 are being driven by several factors, although not necessarily the same factors in each country. Among the drivers are above-average gross domestic product growth, large populations, rising per capita income, strong consumer demand, increasing exports, high infrastructure spending and relatively sound economic fundamentals.

The main shift, Asdhir says, is that many of the Next 11 “now have a rapidly growing middle class.” This is attributable to high GDP growth rates and growing per-capita income, which are spurring strong consumer demand and infrastructure spending.

The Next 11, which account for almost 13% of global growth, have a combined population of more than 1.2 billion. Using World Bank rankings, South Korea is the only country ranked as “high income,” while Mexico and Turkey are classified as “upper middle income.” Incidentally, these three countries have the largest economies in the group. Bangladesh and Vietnam are ranked as “low income,” while the remaining countries are classified as “lower middle income.”

Ironically, the poorest of the Next 11, Bangladesh, had the best-performing stock market in the group last year, growing by 43.2% in U.S.-dollar terms on the MSCI frontier markets index. “It is a very interesting country that is poor and has lots of problems,” Mobius says, adding that it is a beneficiary of low labour rates. Agriculture and exports, primarily in textiles, he says, are important sectors.

At the other end of the wealth spectrum is South Korea, the richest of the Next 11; it has the smallest population in the group, but is among the more developed. Mobius sees opportunities in oil and gas, electronics, shipbuilding and repairs, and banks.

Mexico and Turkey have the “potential to become even stronger in terms of size, depth and efficiency of their financial markets,” says the Goldman Sachs report.

In Mexico, Mobius favours telecommunications and retail oriented toward domestic consumption; in Turkey, his emphasis is on banks, domestic refineries and pharmaceutical distribution.

Indonesia, the fourth-most populous country in the world and the largest, by population, in the Next 11 is “further along the [development] curve,” says Grammer. “It is one of the more important countries” in the group.

Indonesia is “benefiting from increasing investments,” adds Mobius, who likes companies oriented toward domestic consumption, automobile, motorcycle and heavy-equipment manufacturers, and palm oil.

Although Vietnam had the worst-performing stock market among the Next 11 last year and is the second poorest among the Next 11, the Goldman Sachs report says that along with Egypt, Vietnam shows a high level of financial development.

“Vietnam’s stock market is small and relatively illiquid, but it is changing,” says Mobius. Opportunities are “all over the map,” but his focus is on retail, banks and shipbuilding.

Among Mobius’s holdings in Egypt are in cement and telecom.

In the Philippines, Mobius likes supermarkets, department stores, telecoms and selected property companies; in Pakistan, he favours oil and gas, energy, banks and textile companies; and, in Nigeria, he is invested in banks, breweries and companies oriented toward the domestic market.

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.

More articles by Dwarka Lakhan