Jim O’Neill, chairman of Goldman Sachs Asset Management and boss of Kathryn Koch, senior portfolio strategist at GSAM, coined the moniker BRIC in 2001. As growth in Brazil, Russia, India and China slows, O’Neill, together with Koch and the team at GSAM, have come up with a new investment idea, the Next 11 growth markets. Dubbed the N-11, the grouping is led by South Korea, Mexico, Indonesia and Turkey and seven other emerging markets.

“There are some 170 countries that can be referred to as emerging markets, but we focus on seven of them — Nigeria, Vietnam, the Philippines, Iran, Egypt, Pakistan and Bangladesh,” Koch elaborates. “It’s an appropriate way to refer to countries in an early stage of development with lots of scope for investment.”

 

The common factor among these seven nondeveloped countries is that each has at least 1% share of the world’s GDP and possesses the demographics to become a growth market one day, Koch says.

 

“Right now, a big area of focus is the growth in emerging markets and, within that subset, we’re particularly excited about the N-11 countries,” Koch says in a recent interview with The Edge Singapore during a whirlwind tour of Asia that took her to four countries. Already, the N-11 portfolio of stocks last year trumped the BRIC countries, largely because of Indonesia, which was up 11% in USdollar terms, and the Philippines, which was up 2%.

 

Although they appear to be a bunch of Third-World countries fighting terrorism, riots and poverty, to Koch, they are the next frontier for investors with strong hearts and deep pockets.

 

Koch says consumer spending, infrastructure development and relocation of manufacturing from China will be the three big themes for the N-11 countries.

 

As she sees it, the N-11 consumer will outspend the Japanese consumer by next year, while the BRIC consumer will outspend the US consumer over the next eight years. But isn’t it easier to buy into European and US companies with exposure to the N-11 than invest in unstable countries?

 

“Thematically, most of the equity exposure is in domestically oriented sectors,” she says.

 

“One of the attractive things about the N-11 is they are pretty sheltered from the issues in the developed markets.”

 

But Koch agrees that only 10 of the N-11 are investable (Iran is under sanctions from the US and the EU), as they are all at different stages of development and hence investability. “We think it makes sense for the allocation to be made depending on GDP rather than equal weighting. So, we don’t think it makes sense to have as much of one’s portfolio in Vietnam as it does in South Korea for a variety of issues,” she says.

 

The result is that about 75% of the N-11 portfolio is invested in growth markets such as Mexico, South Korea, Indonesia and Turkey, with the rest of the portfolio diversified among the rest of the seven countries with high risk but also high returns, Koch explains. “We advocate being selective. We don’t want to own the whole Vietnamese or Nigerian market but just find a few companies that you think are going to be exposed to positive growth trends and run by management teams that meet your quality of standard with good corporate governance. It’s possible to find these companies if you approached it bottom up,” says Koch.

 

Take, for example, the case of Nigeria and South Korea.

 

“When you take a look at the consumer story, there is really a wide diversity you can play.

 

For example, you can see Nigerians going from home-made banana-made beer to drinking their own branded beer,” she points out.

 

With Pyongchang the venue for the 2018 Winter Olympics, investors can also play South Korean integrated resorts companies, which have exposure to both gaming and ski resorts.

 

Infrastructure development in places such as Nigeria and Bangladesh is another theme that Koch highlights. In both countries, only 20% of the power is provided on the grid. Building power, water, sanitation and transport infrastructure would reduce costs for the population and industry.

 

The N-11 are also in a good position to benefit from the relocation of manufacturing from China if wages go up and the renminbi strengthens, making it uncompetitive. “Bangladesh is a great example of a country taking that manufacturing share away from China,” Koch points out. This speeds up growth and creates jobs, which eventually translate into more domestic consumption.

 

“Bangladesh’s exports to the US in the post-crisis world are up 20%, even though growth in the US has slowed. So, this means they are taking market share away from China,” she reasons.

What will happen to the BRICs then?

 

“The BRICs are still there. It is a very successful concept and the countries have led in terms of contribution to global growth. It’s a 65% contributor to global growth in the last decade,” Koch says. “Now that we’ve hit the 10-year anniversary of that concept, recently, clients are increasingly asking what could be the next interesting opportunities after the BRICs and the N-11 are meant to identify the next set of opportunities.

 

“We absolutely believe the BRIC thesis is still intact and these countries remain exciting and interesting. The reality is that, over the next couple of decades, the BRIC rate of growth will slow as economies evolve and develop. However, it will still be much stronger growth than what we see coming out of the US, Japan and Europe.”

 

In the decade from 2001 to 2011, in nominal USD terms, Brazil’s GDP has grown 202% and the Bovespa 356%; Russian GDP is 474% higher and the Micex has surged 629%; India’s GDP is up 244% and the Sensex is 388% higher; and China’s GDP is 193% higher and the Shanghai Composite Index is up 25%.

 

Koch says the kind of growth seen in the BRICs will change in the next 10 years. “There are themes from an investment perspective that are in the very early stages among the BRICs. I would highlight, for example, the consumer, and that presents a phenomenal investment opportunity that has not fully played out.”

 

China, the largest of the BRICs by GDP and the world’s second-largest economy, will grow slower over the next several decades and the type of growth is going to change. “It’s going to go from an export-driven market to a consumer market. By definition, if the currency strengthens and wages go up, you are going to diversify your economy to consumer-driven sources of growth,” she explains.

 

As China urbanises, the rise of the middle class will present investment opportunities right across the spectrum, from low-end purchases to very high-end luxury goods, Koch predicts.

 

Currently, the country is already the world’s largest mobile phone, car and flat-screen-TV market. In the next 10 years, it is going to be the largest aviation market, says Koch, who sees the themes of digitalisation, green energy and the consumer as having a “long runway” before them.

 

“This growth is not exclusive. It will certainly benefit local companies but, to some extent, it will benefit developed market companies,” she says. “If you look at Europe or the US, some of the best-performing companies are the ones that have figured out how to sell their products and services to consumers in growth and emerging markets.

 

“We are excited about digitalisation, which is the use of technology to increase productivity. As manual labour becomes more expensive, it will become more important for companies to digitalise. We are also interested in opportunities in the green technology field, and energy efficiency is going to be a priority for the Chinese.”

 

For Russia, Koch is bullish about the consumer sector, since people there are relatively well off compared with the other BRICs. However, a dearth of listed consumer companies limits the scope for investments there.

 

Over in Brazil, consumption and investment will be big contributors, owing partly to the run-up to the 2014 World Cup tournament and the 2016 Olympics. Another sector Koch has singled out is the provision of private secondary education, a direct proxy to the rise of the middle-class.

 

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