Interactive Investor

Four countries tipped to make you a MINT

8th January 2014 14:01

Esther Armstrong from interactive investor

The tag "BRIC countries", coined by former Goldman Sachs chief economist Jim O'Neill, has become fairly familiar since 2001 and represents the four countries he believed had the fastest growth potential at the time: Brazil, Russia, India and China.

To find out what makes the BRIC nations so special and how to invest in them if you chose to do so, read: Guide to BRIC.

Following the widespread adoption of the acronym O'Neill and his team then came up with the "Next 11", a list of countries to watch for future growth.

In 2007 they issued Beyond the BRICs: A look at the Next 11, which attested that even if they lacked the scale to become the next BRICs, these countries could rival the G7 over time in areas spanning energy, infrastructure, human capital and technology.

The Next 11 comprises Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam.

Despite this accolade, however, countries such as Indonesia and Nigeria have fought for inclusion with the original BRIC countries, clamouring for a label change to BRIIC or BRINC.

One country did make the grade; at its third summit in 2011, South Africa formally joined the group, changing the acronym to BRICS. This addition, however, has been largely ignored by the investing community.

Now Indonesia and Nigeria have been granted a quartet of their own - MINT - and are joined by Mexico and Turkey.

Fresh start

In an opinion piece on Bloomberg View, O'Neill says: "I spent the last week in Indonesia, working on a series for BBC Radio Four about the world's most populous non-BRIC emerging economies.

"The BRIC countries are already closely watched. The group I'm studying for this project - let's call them MINT economies - deserve no less attention. Mexico, Indonesia, Nigeria and Turkey all have very favourable demographics for at least the next 20 years, and their economic prospects are interesting.

"Policy makers and thinkers in the MINT countries have often asked me why I left them out of that first classification."

He explains that at the time he did not think these countries would do enough with economic policy to quickly realise their potential.

In O'Neill's BBC project he visited each of the MINT countries to try and get a feel for whether they are truly going places.

Catchy monikers aside he realises the need for tangible levers and policies to enable these countries to make the most of their growth opportunities.

It must be noted economic growth does not always translate into stockmarket performance, but if you had invested in any of the BRIC nations 10 years ago and kept your money there through the (at times titanic) shockwaves you would without exception have beaten the MSCI World, UK and USA indices in terms of total return.

Nerves of steel

Timing really does count in these countries, or more accurately having the temerity to stick in there when the markets suffer one of these crises of confidence.

The second half of 2008, and to a lesser extent the second half of 2011, were just such times. When the developed market equity indices, particularly in the US, tumble, the emerging market indices tend to follow and then keep going.

Mexico, Indonesia, Nigeria and Turkey all have very favourable demographics for at least the next 20 years, and their economic prospects are interesting."Jim O'Neill

Despite this the MSCI Brazil Index is the star performer, returning 303% over the 10 years to 3 January, while China's 225% and India's 194% of index growth isn't too shabby either.

MSCI Russia's performance is closer to that of the UK and World, with its 122% return not a million miles away from the MSCI UK and MSCI World indices' 111% of growth. MSCI USA returned 110% over the same period.

Looking at the MINT countries, not all of them have an MSCI Index going back 10 years, so we have taken a five-year timeframe.

The growth over that period diverges rather significantly. MSCI Indonesia has returned 126%, which perhaps supports its claim it has as much right as Russia to be in the BRICs.

Next in line is MSCI Mexico, which returned 88% over the same period, just less than MSCI USA at 89%. MSCI UK returned 77% over five years, with the MSCI World slightly lower at 71%.

Both Turkey and Nigeria lag significantly behind the rest with growth of 55% and 53% respectively.

The demographics of the MINT economies are what is driving O'Neill's interest in them. They have been described as having good "inner" demographics, which means they are going to see a rise in the number of people eligible to work relative to those not working.

This is a positive they have over many developed countries, which have ageing populations, but also the powerhouse of the BRIC countries - China.

O'Neill contends that if these four countries pull their socks up they could achieve the same double-digit growth rates witnessed by China between 2003 and 2008.

Mountain of work

There is a lot to do though. So far, O'Neill has only presented his in-depth research on Mexico and Indonesia, but all four nations are facing similar problems.

Lack of higher education and infrastructure and in some cases resistance to change among the masses stand in the way of their development. Meanwhile, corruption harbours black markets which run alongside the legitimate economies and make it hard for honest companies to compete.

Political consensus is missing in most cases too, meaning the governments struggle to find backing for the radical policy changes required.

In Indonesia, for example, huge fuel subsidies cost the government dear, but would be very unpopular to change. In Mexico the right for teachers to pass their job onto relatives when they retire has just been changed but has been met with much protest and objection.

A sea-change in the way China is aiming to run its economy could come as a double-edged sword for the MINT countries. The economic superpower's planned transition towards a more consumer-led economy rather than an export-led model means it is gradually allowing workers' wages to increase and the currency to appreciate.

This has led to what some have dubbed "Mexico's moment" - a return of outsourcing from the US to Mexican manufacturers over their Chinese rivals as their exports become less attractive.

Mexico's relative proximity and efficiency in processing orders mean that even if their quotes are still slightly higher than Chinese companies, they will in many cases get the job.

For Indonesia, which relies heavily on commodity demand for its growth, China's shift in economic policy could be damaging unless it too adjusts.

Following his visit to Indonesia O'Neill admitted it could be a "bubble driven by a decade of rampant commodity prices". Flat commodity prices and lessening Chinese demand for them puts Indonesia's growth at risk.

Reliance on commodities is not the only sign of a bubble in Indonesia, property prices have also increased significantly and 85% of investment is currently in residence and leisure construction, while infrastructure expenditure is less than half of what it was back in 1997.

Investor access

Like the BRIC economies before them the MINT nations still have some way to go before they can convince investors of their sustainable growth potential.

The spate of BRIC fund launches a decade ago has now pared back to mainly emerging market specialists such as Franklin Templeton, Allianz and of course Goldman Sachs. Many other fund houses steered clear, or have subsequently closed those products.

Currently, gaining access to individual BRIC countries is most commonly done through passive investments, with single country active funds deemed fairly high risk.

The same will most likely be true of the MINT countries, although if they do replicate the performance of the BRIC trailblazers over the next 10 to 15 years dismissive investors might be sorry.