World Economy: Here come the Civets

Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa.

Businesspeople and pundits had to coin a term for them, but these emerging economies are the latest fad to entice the investment community, it seems. Unsurprising list in reality, with the exception of Egypt and South Africa. 

The southern African country appears to be entering a new phase of press censorship via a new secrets act, alongside political infighting in and surrounding the dominant ANC. And Egypt's economy is in a dire condition after nearly a year of political unrest. 

Back in late 2009 when the ancronym was invented by Robert Ward, Global Foreecasting Director at the Economist Intelligence Unit, Egypt was stable and Julius Malema had yet to be ejected from the African National Congress. Nevertheless, a long view is taken of these economies, which are estimated to grow by an average of 4.9% during the twenty years from 2009.

Political instability and a lack of synergy between these countries is of concern, despite Standard & Poors launching an 'S&P Civets 60 Index' to track the top 10 performing stocks on local exchanges. As Tom Biggar of Torquil Clarke Invests told the BBC, "adventurous investors should only consider (having) no more than 5% of their portfolio in this area." 

With the exception of Egypt, economic growth rates amongst the Civets are impressive. Columbia is projected to grow by 5.1% in 2011, Indonesia by 6.5%, Vietnam by 5.8%, Egypt by 0.6%, Turkey by 7.5% and South Africa by 3.1%. In a volatile time for equities, only three of their stockmarkets have outpertformed in local currency terms since the beginning of the year: Venezuela by + 75.2%, Indonesia by +3.0% and South Africa by +1.7%.

HSBC is among many financial institutions to set up funds with the express aim of reaping benefits from these rapidly-expanding non-BRIC economies.

When will OECD countries cotton on to what's happening, as investors search out more challenging and durable markets?

Certain places need to take note. The Economist sites New Zealand, Belgium, France, Australia, the UK, Canada, the Netherlands, Spain and Sweden as countries where property prices are anything up to 25% overvalued. In most of these personal debt is stuck at historic highs. And The Economist reckons that in Belgium, France, Australia and Canada houses look "more overvalued than ... in America at the height of the bubble". 

The Economist used "price-to-income ratios - a gauge of affordability - and price-to-rent ratios" to calculate its findings. Even when housing supply issues are taken into account, as in Auckland and Southern England, these are disturbing times.

Encouragingly, ANZ Bank's property analyst David Cannington said "ratios didn’t give the full picture.  Household financial stability was still quite strong, people were paying down debt and unemployment was not causing significant stress" reported the Sydney Morning Herald in an attempt to calm Australian readers.

In any event, as property owners in these developed countries fret about their most vital asset, wouldn't a re-direction of wealth out of property and into developing industry and productivity and stimulating innovation be preferable?

In New Zealand, a country with an undercapitalised stock market, the government plans to sell minority stakes in four state-owned power companies as well as the national airline in order to boost private investment in equities. For too long property has been viewed as a safe long-term asset class, a strategy which has left entrepreneurs and expanding businesses short of seed and risk capital. The opposition Labour Party champions the concept of a capital gains tax (CGT), but this would not be restricted to investment property.  The National Party was right to criticise any proposal which would disincentivise risk-taking start-up entrepreneurs from reaping the rewards of their endeavours. But National was wrong to rule out the idea of a CGT altogether, for any measure which would rake back investment from the property market and return it to the sharemarket or place it into venture capital funds should be applauded.

Money tied up in land and houses should be released to grow the economies of OECD countries. Competition with the BRICs, Civets and others is bound to become increasingly hard for many.  As G7 growth during the twenty years from 2009 is projected to average 1.8%, it's possible to see why responsible economic growth has to be pursued by mature economies before they find themselves lagging embarrassingly behind recently emerged ones.

A re-think has to be on the cards.

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