As market participants absorb the reverberations of the latest Fed acronym – QE3 – some market participants are looking to a new country acronym as the next place to put their focus.
There is a growing buzz that the MIST countries – Mexico, Indonesia, South Korea and Turkey – warrant some attention among the investing community. The cost of entry is lower as is the level of complexity compared with the giant BRIC countries – Brazil, Russia, India and China. Each MIST country represents more than one percent of global gross domestic product (GDP). Each of these countries is a member of G-20, the group of finance ministers and central bank governors from 20 major economies. And real GDP growth in this group has been in the neighborhood of 5 percent to 8 percent each year in recent years.
Jim O’Neill, the Goldman Sachs economist who came up with the now-well known “BRIC” acronym, coined the MIST acronym and reportedly pointed to these areas of the world as some of the next notable emerging markets. The MIST nations are the biggest markets in Goldman Sachs’ N-11 Equity Fund, launched in February.
And compared with the BRICs, the MIST group of countries appears to have a bit more upside potential. Larry Shover, chief investment officer of mutual fund Solutions Funds Group, notes that the total GDP of the MIST countries is less than one-third of the BRICS – $3.9 trillion compared with $14 trillion.
“People are recognizing that there is still a lot of room for improvement in these economies,” Shover says.
Getting In On The Ground Floor
Of the new countries under the spotlight, Mexico and Turkey are gathering some of the most steam. Mexico is gaining on China in manufactured exports as labor costs rise in China. Mexico’s level of inflation has stayed in check, and the country stands to benefit from any economic improvements in the United States.
In Turkey, a move by firms to refocus on Africa and the Middle East has helped to generate a double-digit growth in exports. Mexico and Turkey also have a fairly young labor force.
Southeast Asia’s largest economy, Indonesia, has exhibited some of the strongest resilience, as its growing consumer class was little impacted by the debt problems plaguing much of the rest of the globe. In August, it became known that Indonesia’s gross domestic product climbed 6.4 percent from a year earlier and 2.8 percent from the previous quarter.
People feel they’re “getting in on the ground floor” in these countries, says Shover. He adds that these days, with the advent of electronic trade integrating exchanges and their products, a challenging U.S. economic environment and more savvy and international evolution of the industry, “even the average investor is being forced to become more globally diversified.”
Shover says that in his interactions with the registered investment advisor world, he’s seen that five to seven years ago exposure to international markets was around 20 percent (large cap 8 percent, small cap 9 percent and emerging markets 3 percent). Today, allocations are between 25 percent and 35 percent to international markets.
Financial exchanges in some of the MIST countries are also increasingly forming partnerships that attract international investors.
In March 2010, the parent company of the Mexican Derivatives Exchange (MexDer), BMV Group, entered into a strategic partnership with CME Group. The first phase of the in 2011 gave Mexican investors access to CME Group’s interest rates, foreign currencies, equity indexes, energy, metals and agricultural commodities. In August 2012, they announced the successful launch of their north-to-south order routing agreement, giving customers in the U.S. access to MexDer’s Mexican Stock Exchange Index Futures, Bond Futures and MXN Peso / US Dollar Futures contracts.
South Korea had already been on the radar screen for many investors. South Korea has a far higher per capita GDP than the other MIST countries at $27,000. The country is also one of the fastest-growing members of the the Organization for Economic Co-operation and Development (OECD). Korea Exchange’s main benchmark stock index is the KRX KOSPI 200. Futures and options contracts tied to the index’s value are the world’s most-traded derivatives contracts, according to the Futures Industry Association. The KOSPI is seen as one of most used indices by retail investors.
Further, South Korea’s policy has become very integrated with Western policy. South Korea is a seen as a very mature market with a highly-educated workforce even though it has only been around for 64 years. The downside to South Korea is that, not unlike the U.S., their population is quickly aging.
Meantime, the MIST countries seem to be evading at least some of the concerns surrounding other countries.
IMF officials released new economic forecasts October 9 that showed growth is slowing in the emerging marketsthat had been driving global expansion. However, the IMF’s 5.6 percent revised rate for developing nations still far outdoes the 1.5 percent growth projection for established economies. A Chinese manufacturing survey pointed to an 11th month of contraction andJapan’s exports fell in August, supporting the case for increased stimulus in the region.
According to Moody’s Investors Service, the main risks to the global macro outlook stem from a deeper than currently expected recession in the euro area, for example caused by deeper credit contraction; the risk of a hard landing in major emerging market economies, including China, India and Brazil; an oil-price supply-side shock resulting from resurfacing geopolitical risks; and the risk of sudden and sharp fiscal tightening in the United States in 2013, given recent political gridlock.
One thing is for sure, the trend toward involvement in a growing number of markets is one which is not likely to soon go away. “If you are an active participant in the market, you are going to want to keep abreast of anything that is going on,” says Daniel Stecich, senior VP, TJM Institutional Services. “So you are a step ahead of the game if you are going to make a trade.”
Stecich notes that market players tend to gravitate to where there is volatility. It’s about what market is the most tradable, he says.
Will Patrick, senior director FX products at CME Group, warns that before any market participant gets involved in emerging market currencies, it is a good idea to be aware of volatility levels and thereafter margin requirements.
Emerging market currencies “often put a higher demand on capital as the markets are less liquid, prone to big movements and political instability,” he contends. Also, he suggests potential market participants research the currency to see if there are foreign exchange controls and healthy over-the-counter markets that run parallel as a guide to the levels of liquidity.