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Forget China: The Next Growth Markets

China's economy, with a growing middle class that companies would love to feed, clothe, house, and entertain, has hit some speed bumps recently:

  • GDP growth is expected to slow to 8% for the first quarter, compared to 8.9% from the previous quarter.
  • Only four of China's 70 largest cities saw home prices rise in February.
  • Exports to Europe declined over 1% for January and February compared to last year.
  • China's total trade deficit for January and February was $4.25 billion, up from $890 million last year.

With China slowing, what country should investors look to next? Why not listen to the man responsible for coining the term BRIC (Brazil, Russia, India, and China): Jim O'Neill.

Even if he does work for the not-so-popular Goldman Sachs, O'Neill highlighted countries that, if measured by the Dow Jones BRIC 50 Index, outperformed the S&P 500 (INDEX: ^GSPC  ) by almost 600% from the beginning of 2003.

What countries does O'Neill think are primed for growth? Get ready for another catchy acronym: MIST, meaning Mexico, Indonesia, South Korea, and Turkey. All these countries rank worldwide between the 10th and 20th largest GDPs and had GDP growth rates above 5% for 2010. Let's dig a little deeper into the opportunities of each country.

Yes, since 2006 almost 50,000 people have been killed in drug-related violence. However, with polls for July's presidential election favoring the opposing party's candidate, the support for the drug war appears to be waning. Given a more secure country, investors and companies could see better returns. Already, Coca Cola is investing $5 billion over five years in Mexico with plans to increase its workforce by more than 10%. Meanwhile, Ford is investing $1.3 billion in a northern Mexico plant to produce the Ford Fusion and Lincoln MKZ.

Want a piece of Mexico that's backed by the genius of McDonald's? A promising pick with a large footprint in a BRIC country is Arcos Dorados (NYSE: ARCO  ) . The company owns, operates, and grants franchises of McDonald's in Latin America, and 26% of its restaurants are located in Mexico, Panama, and Costa Rica, with about 36% located in Brazil. As Mexico and other Latin American countries grow wealthy, serving food in these countries begins to look appetizing.

Guess which country quietly sits behind the U.S. in terms of population? Since this paragraph is about Indonesia, I'm assuming you guessed correctly; Indonesia is the world's fourth most populous country. Rather than taking the traditional first step of adopting landline service, Indonesians have skipped straight to cell phones. Mobile phone ownership was at 20% in 2005, and in 2011 it skyrocketed to 54%. Along with that, Indonesian users are the second-largest market on Facebook and third-largest on Twitter. As more services and data are delivered by mobile, take a look at Telekom Indonesia (NYSE: TLK  ) . It sports a 4.7% dividend yield and is the country's largest mobile network operator.

South Korea
While its neighbor to the north tries out a new ruler, South Korea looks to break free from the conglomerates that run its economy. As reported in the Financial Times, "The top four conglomerates alone earn 27 per cent of all profits." And even though South Korea has an enviable 3.4% unemployment rate, 34% of workers were in temporary jobs. Even so, the iShares MSCI South Korea Index Fund (NYSE: EWY  ) returned 160% over the past decade. Remember to note the expense ratio when looking at ETFs like this one, and also what exactly it holds -- in this case, an expense ratio of 0.59% and significant holdings in Samsung and Hyundai.

Talked up because of its unique position between world regions, Turkey is also exposed to geopolitical issues in the Middle East and economic fallout from Europe. Additionally, Turkey imports 71% of its net energy use, making it susceptible to high oil prices. Still, in a world where demand from European countries may fall, 70% of Turkey's GDP comes from household consumption. If Turkey interests you, the iShares MSCI Turkey Index Fund (NYSE: TUR  ) is an easy way to place the country in your portfolio. However, note that the ETF is heavily invested in Turkish banks, and with a pullback from banks worldwide -- for example, Citigroup looking to cut its ownership stake of Turkish Akbank -- that financial sector may struggle.

A MISTy portfolio may also grow mold
As with all emerging and growth countries, any excess returns are paired with more risk. There is no guarantee Mexico's drug war will find a ceasefire, natural disasters could again harm Indonesia, South Korea always keeps an eye northward, and Turkey's bridge between East and West may just mean it is exposed to both slow growth and political instability. Therefore, do your due diligence on both country and company before investing in the MIST.

If you'd rather support American companies but still want to diversify to capture growth economies, check out our free report: "3 American Companies Set to Dominate the World."

Fool contributor Dan Newman thinks that based solely on its name, Qatar will never make it into an acronym. He holds no shares of the companies mentioned above. Follow him @TMFHelloNewman.

The Motley Fool owns shares of Arcos Dorados Holdings Cla, Coca-Cola, Telekom Indonesia, and Ford Motor. Motley Fool newsletter services have recommended buying shares of Coca-Cola, Telekom Indonesia, Arcos Dorados Holdings, and Ford Motor. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (5) | Recommend This Article (22)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 05, 2012, at 12:41 PM, ETFsRule wrote:

    "Yes, since 2006 almost 50,000 people have been killed in drug-related violence. However, with polls for July's presidential election favoring the opposing party's candidate, the support for the drug war appears to be waning. Given a more secure country, investors and companies could see better returns."

    Well, I hope he has a plan to stop drug lords from kidnapping and murdering people all over the country... I don't think negotiating with them will work.

  • Report this Comment On April 05, 2012, at 1:29 PM, XMFHelloNewman wrote:


    True - it will be a tough situation for awhile, but the violence might subside through different tactics:

    "A new president," Jones said, "may favor less of a militarized approach, relying more on civilian police forces and focusing more on economic growth and social-welfare programs to try to keep people from joining the cartels."

  • Report this Comment On April 05, 2012, at 1:41 PM, TheDumbMoney wrote:

    The best way to invest in a broad array of emerging economies is probably Vanguard's VWO ETF. It has a lot of China exposure, but also a lot from many of these countries. That way you remove the company-specific risk, since analysis of these companies is even more difficult than analyzing American companies: the Sino Forests of the world are not limited to China.

  • Report this Comment On April 06, 2012, at 9:23 AM, ETFsRule wrote:

    "The best way to invest in a broad array of emerging economies is probably Vanguard's VWO ETF. "

    I would say that investors need to research any ETF to make sure it gives them what they are looking for. If you don't want to buy individual companies, it is usually better to buy a few country-specific ETF's rather than a generic emerging-market ETF. Funds like that will give you exposure to countries that you aren't interested in, and they will often leave out the highest-performing companies.

    They invest in so many different countries, that what they usually end up doing is simply investing in the largest companies from each of those countries. Therefore they leave out the more "local", high-growth, small-cap companies that often do very well.

    For instance: the companies in VWO have a median market cap of $17.8 billion, and their top holding is Samsung. That's fine for a risk-averse investor - but you shouldn't expect to see the explosive growth that you might expect from emerging markets. So I would stick to country-specific ETF's, or ETF's that focus more on midcap or small cap companies (ie: DGS).

  • Report this Comment On August 14, 2012, at 10:51 PM, MHedgeFundTrader wrote:

    One of the great things about running a website with a truly global reach is that readers send me material which is nothing less than outrageous. So I had to laugh when I found in my inbox an animation of two bears discussing the hopelessly idiotic approach the US government has taken towards its trade with China over the past two decades.

    America gave away 25 million jobs, got nothing in return, with the end result that our standard of living is falling, while China’s is rising. The Chinese made this easy by devaluing their currency 50%, thus giving their exporters an unassailable price advantage. This has enabled the Middle Kingdom to buy an increasingly larger part of the US every year at knock down prices.

    The US could address this imbalance at anytime through the imposition of punitive import duties and forcing a revaluation of the Chinese Yuan. But any attempts to do so are fought off by well-financed libertarian pro business elements spouting the principals of free trade. So China laughs all the way to the bank, and the unemployment rate here ratchets ever skyward.

    The Mad Hedge Fund Trader

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