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Will the BRICS be engulfed in MIST ?

Posted in Finance Articles, Total Reads: 2105 , Published on August 05, 2013

BRICS was a new and relatively lesser known acronym in 2001, when it was created by the Goldman Sachs Asset Management Chairman, Jim O Neil. Since then, BRICS has come a long way and occupied the minds of all the investors especially after the 2008 crisis. Now the BRICS Inventor, Jim O Neil is trying to create a new Storm in the markets with his new Acronym MIST. For the uninitiated, MIST stands for Mexico, Indonesia, South Korea and Turkey and was created by Goldman Sachs with the purpose of focusing their N-11 Fund Investments in these countries.  The Goldman Sachs N-11 Equity Fund (GSYAX) has grown by 12 % this year compared with a mere 1.5% gain in Goldman Sachs’ fund for BRICS. This shows the huge underlying economic growth potential in MIST and the diminishing investor confidence in BRICS. The MIST Economies have nearly doubled in this decade coming out of deep slumber with an impressive growth rate in GDP undeterred by the recent turmoil in Euro Zone and US Markets. Let’s have a look at the strengths of the individual countries in the MIST:

Mexico has developed its Manufacturing Industry by leaps and bounds focusing on lower costs and is posing a serious threat to China, famed for its China Price. Mexico is able to lower costs by taking advantage of the cheap labour force available abundantly whereas China has had to contend with rising costs on account of increasing wages, land prices, Environmental and safety taxes. China’s wages have recently been hiked by 22%. Mexico’s cheap labour is owing to the growing young population with 65% of its population falling in the 15-65 years bracket. These demographic trends can be better understood in this ratio: 9 children for every elderly person in Mexico. Mexico also benefitted from reduced shipping costs to the US and lesser transaction costs as it is a NATO member. Mexico has grown by 4.6% in the first 3 months of 2012, with strong growth prospects in the future.

Indonesia also has the advantage of young demographics that is helpful in growth of economy. It also has the advantage of being in the ASEAN-China Free Trade area and has translated all these advantages effectively to put up impressive growth rates of 6% in GDP in the last 3 years. Indonesia’s growth rate has surpassed that of India’s GDP growth recently with a smaller population and fewer resources. Indonesia grew strongly during the 2008 crisis mainly with the help of robust Consumption driven growth with 60% of GDP being contributed by Indonesian consumers. Indonesia’s exports were negligible during the years of crisis and that helped in limiting the negative effects. Of late, Indonesia has raised its exports to China significantly with the main export items being Commodities and natural resources.

Turkey has a relatively small Debt to GDP ratio of 40%, along has managed to attract significantly high amounts of FDI. This has helped in improving the Investor’s confidence in Turkey and attracted investments from foreign countries and local markets. South Korea can be considered more of a developed country, with many internationally acclaimed Brands such as Samsung, Hyundai, LG, etc. These Companies have managed to bring in Investor flows into the country and rise South Korea into the Spotlight.

Finally, it’s time to look at the other side of the coin as well. Though MIST has overtaken BRICS in terms of Growth rate, MIST has a very small GDP of $3.9 trillion (Each of the MIST countries represent only 1% of the world’s GDP) last year compared to $13.5 trillion of BRICS. In Population parameters, MIST nations have fewer than 500 million people in contrast with the 2.9 Billion people in BRICS countries. Although we have considered the MIST countries in unison as good performing economies, we should also consider the Macro-factors affecting them. The consequences of fiscal cliff of US has a direct implication on Mexico’s exports; a hard landing in China can deter Indonesia from continuing its growth spiral, growing inequities in South Korea can pull down the prospects of MIST significantly. Moreover, the sputtering engines of growth in India, China and Brazil can revive in the next 2 years and come back strongly. MIST’s prospects are good in the short term, but how they will pan out in the long term; we have to wait and watch.

The Article has been authored by Harish Mohan, K.J.Somaiya Institute of Management Studies

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