Corporate America: The New Cash Cow

There’s certainly plenty of cash available to keep fueling this deal boom. According to Moody’s Investors Service (NYSE: MCO) U.S. non-financial corporations are currently sitting on $1.84 trillion in cash. When measured as a percentage of total corporate assets, that’s Corporate America’s biggest cash hoard in 50 years.

And that cache of cash doesn”t end there: Hedge funds hold an additional $450 billion in cash, which can also be brought to bear in M&A deals. With bond-market conditions also currently favorable and interest rates at 50-year lows, it’s thus not surprising that top Corporate America execs are indulging their wildest empire-building fantasies.

U.S. CEOs could, of course, be paying that money out to shareholders as dividends. As of Aug. 25, the dividend yield on the Standard and Poor’s 500 Index was 2.09% -representing a 40% dividend-payout ratio on an S&P index that was trading at 19.38-times earnings.

While that’s above the average of 32% payout ratio of the 2000s it’s well below historical levels – the payout ratio in the Great Depression was greater than 90% and averaged more than 55% through the 1950s and 1960s. Given the huge amounts of cash that so many companies currently possess – as well as the relatively favorable tax treatment of dividends (individuals currently pay only 15% on dividend income) that’s right now in place – U.S. public companies could easily pay out much more of their income in dividends than they presently are.

As shareholders, we should demand higher dividend payouts. Historically, dividends have represented about half the return on the S&P 500 Index. Dividends alone provided U.S. shareholders with a total uncompounded return of 61% in the 1980s and 43% in the 1990s.

The 2000s, by comparison, were pathetic: Dividends provided a total return of only 16%, not enough to make the overall return positive. Given that companies have accumulated record levels of cash (as well as making innumerable fatuous takeovers), we investors should feel shortchanged.

The Dealmaking Payoff

A number of factors have caused this change in management behavior.

First and foremost, monetary policy has been very loose since 1995. So there’s always been lots of liquidity sloshing around the global financial system, making mergers easy to finance.

Modern financial theory has held that a company should concern itself mostly with the tax consequences of its balance sheet. This meant that earlier concepts of balance-sheet ‘soundness” were irrelevant and that cash dividends should be of less interest to investors than the fluctuations in the company’s stock price. Top managers have increasingly been rewarded with stock options, and as a result have come to view dividends as unattractive, since those payouts take cash out of the company – reducing the value of the shares (besides, option-holders themselves don”t reap the benefit of dividends).

These have all been factors. However, the most important factors leading to merger activity have arisen from the shift in the shareholder power base that we”ve seen. It was once true that large individual shareholders exercised direct control over a company’s management.

But that’s now a relatively rare situation: The top shareholders are now largely institutional in nature. And rather than waste time sparring with a corporate management team whose policies or strategies it doesn”t like or agree with, an institutional investor will be all too willing to simply “dump” its shares.

All of these changes have induced corporate leaders to treat companies as their own private piggy banks, paying themselves ever-larger salaries and bonuses and being relatively unconcerned about shareholder value – except as something to which they pay lip service.

Most important, managers get rewarded based on the size of their empires. This elevates the importance of the M&A deal: Acquisitions, which increase the size of the empire being managed, become all the more alluring to a CEO who is looking to increase the span of the company he controls.

Merger-and-acquisition deals have the additional advantage of allowing frequent restatements of earnings and other financial accounts, meaning it’s easier for managers to hide losses or other financial problems without having to actually run them all the way through the income statement.

Some of these same issues make M&A deals attractive to the target (“acquiree”) company. For instance, with the “golden-parachute” payouts and other payoffs that management teams receive as compensation when their firm is taken over, it’s not surprising that the leaders of a firm that becomes a buyout candidate don”t fight too hard to preserve their company’s independence. When Potash CEO Bill Doyle is due to receive a $445 million payoff when his company is sold, he will be less than ferocious in opposing the sale.

Thus, it is not surprising that corporate cash is useful to management primarily for acquisitions. If the shareholders are particularly quiescent, as in the Kraft Foods Inc. (NYSE: KFT) takeover of Cadbury PLC (NYSE ADR: CDSCY), the buying chief executive can be paid off with a $27 million premium for undergoing the nervous stress of arranging the deal, without waiting to see whether it actually provided any benefit to Kraft.

In that case even Warren Buffett, owning 9% of Kraft stock, was unable to prevent the acquisition, as Kraft’s financially counterproductive aggression and its oodles of cheap money wiped out a 200-year-old British company.

Management behavior will only change when its incentives change, and that won”t happen until interest rates are much higher than they are today. In the meantime, the damage that foolish acquisitions will inflict on U.S. industry is immeasurable: Corporate America will slash employment, hold back on capital investment and – worst of all for the future – dial down research-and-development activities.

[Editor's Note: Martin Hutchinson brings readers the global view that most financial columnists only wish they could provide.

Just look at some of his most recent global predictions. Earlier this year, just a week after Hutchinson recommended Germany, the European keystone reported much stronger-than-expected GDP. He recommended Chile back in December, and three of the stocks he highlighted have posted strong, double-digit returns - and one is up nearly 25%. He again recommended Korea - which analysts were downgrading - only to have the traditionally conservative International Monetary Fund (IMF) come out with an upgraded forecast that projects solid growth for that Asian Tiger for this year and next.

A longtime international merchant banker, Hutchinson has a nose for profits - as evidenced by his unerring ability to paint a picture of what's to come. He's able to show investors the big profit opportunities that are still over the horizon - while also warning us about the potentially ruinous pitfalls hidden just around the corner.

With his "Alpha Bulldog" investing strategy - the crux of his Permanent Wealth Investor advisory service - Hutchinson puts those global-investing instincts to good use. He's managed to combine dividends, gold and growth into a winning, but low-risk formula that has developed eye-popping returns for subscribers.

Take a moment to find out more about "Alpha-Bulldog" stocks and The Permanent Wealth Investor by just clicking here. You'll find the time well spent.]

News and Related Story Links:

• Money Morning Special Report:
  Investors” Hopes Riding on Surge in M&A Activity.
• Money Morning Special Report:
  Seven Cash Cows That Point the Way to Profit.
• Investopedia:
  Payout Ratio.
• Investopedia:
  How to Read a Balance Sheet.

Despite Controversies, Climate Remains an Issue

Admittedly, it’s been a rough stretch for the cap-and-trade crowd.

The revelation last October that many of the scientists involved in climate-change research had tweaked the data to improve their case was not surprising. The climate-change industry has over the last two decades been rewarded with huge government grants and massive media sympathy. And since some scientists, like anybody else, can be fallible human beings, it wasn’t a surprise that some had papered over flaws in their arguments. Needless to say, it was therefore a relief when the Copenhagen Conference on Climate Change last December failed to produce a meaningful agreement based on that data.

Nevertheless, the fact that many scientists involved in climate change fudged their statistics, and that the Intergovernmental Panel on Climate Change’s Fourth Report in 2007 contained unfounded claims, such as the likely disappearance of the Himalayan glaciers in 2035, does not mean that climate change is entirely a myth.

There is a certain amount of well-attested evidence for climate change, and the suggested mechanism by which excess carbon dioxide might produce global warming is a plausible one. Further work needs to be – and should be – done.

Nevertheless, one can discount the more apocalyptic predictions about future climate and say that, while there may well be some warming in global climate, it is very unlikely to exceed 2 degrees Celsius by 2100. That would imply a rise in ocean levels of no more than a foot or two and only moderate agricultural disruption.

That has important policy implications. And here’s why. Schemes whereby the environmentalists get to rearrange the world economy to suit their own preferences – leading to trillions of dollars a year in lost or wasted output – can be rejected immediately.

The modest improvement in carbon emissions from some of the more-ambitious and complex carbon-capture-and-storage schemes completely fails to balance their enormous cost.

On close inspection, that’s what’s wrong with “cap and trade,” under which the government would announce a yearly cap on carbon emissions and then issue permits to power companies and others producing emissions. The government is not capable of assessing the cost and benefit of different possible levels for the emissions cap. Thus, its ability to issue permits merely produces a huge rent-seeking industry by which it can give favors to campaign contributors.

Last year’s House of Representatives “cap-and-trade” bill was an appalling example of this. It gave out so many favors to those with political “pull” that it ended by producing only an infinitesimal reduction in carbon emissions, and at an enormous cost.

The “cap-and-trade” concept, invented by BP PLC (NYSE ADR: BP) and Enron Corp. in the 1990s as a way to profit through setting up emissions permit trading operations (and through politically favored but uneconomic “biofuels” operations)  may not be entirely dead, even in the United States. Sen. Reid could revive it during the “lame duck” session of Congress after the upcoming mid-term elections, when many legislators will have nothing to lose. However, the balance of probability must be against it, unless the Democrats do unexpectedly well in November.

Hope Not Lost for Those Battling Global Warming

For those whose primary goal is to combat global warming – and not to increase government control over the economy – all hope isn’t lost. Take, for instance, a simple carbon tax, initially imposed at a moderate rate without politically favored exemptions. Such an arrangement:

• Would be much less economically destructive than a cap-and-trade system,
• Would provide few opportunities for rent-seeking by the Enrons of this world.
• And would be at least as effective as a “cap-and-trade” arrangement in combating carbon emissions.

In fact, by increasing the price of emissions, this carbon tax would favor technologies such as natural-gas power stations that reduce those emissions, while at the same time permitting the continued existence of high-emissions operations in areas where their closure would be impossibly expensive.

There’s an additional advantage: This tax would generate revenue for the U.S. Treasury, helping to cut the excessive U.S. budget deficit.

The Likely Path of Climate Reform

No matter which party does better in November, Congress will next year wish to start trimming the deficit, and tax increases are likely to be part of that push. A tax increase that does not fall directly on most consumers – and that can be sold as a “green” initiative – will be very attractive.

Even at a low rate of $15 per metric ton of carbon, such a tax would yield around $100 billion per year, while William D. Nordhaus‘ “optimal” carbon tax of $60 per metric ton would yield close to $400 billion per annum. If imposed without exemptions – and without offsetting wasteful expenditures on boondoggles – a carbon tax could go a long way to reducing the U.S. budget deficit.

Action to Take: For investors, the apparent killing of “cap and trade” is good news; we must hope that it stays dead. On the other hand, a modest carbon tax within the next year or two is quite likely, if only for budgetary reasons. Hence, investors should look carefully at those energy sources such as natural gas and nuclear power, which are low-carbon and cost-effective without additional subsidies.

News and Related Story Links:

• The Financial Times:
  Action on Carbon is Down the Drain
• The Telegraph:
  UN climate change panel based claims on student dissertation and magazine article
• Examiner.com:
  Dr. Michael Mann cleared of tweaking climate change data; second inquiry on the way
• Guardian.UK:
  IPCC officials admit mistake over melting Himalayan glaciers
• Wikipedia:
  Carbon Capture and Storage
• Money Morning News Archive:
  Cap and Trade
• Wikipedia:
  Enron Corp
• Money Morning News Archive:
  Midterm Elections
• Wikipedia:
  Carbon Tax
• William D. Nordhaus:
  Official Website

The New Economic Heavyweight

When it comes to gold prices, two news items relating to China have to warm investor hearts. First, China has again moved to liberalize further its domestic citizens ability to purchase gold. Chinese citizens are among the world’s most avid savers, meaning they’ll have plenty of money to invest in gold – just as Beijing is telling them to do.

And just yesterday (Monday), in fact, headlines declared that China was making the move to leapfrog Japan and become the world’s second-largest economy. With those two catalysts, and China’s economy continuing to grow at 10% per annum, gold investors can happily anticipate an early price breakthrough to new highs.

And that’s not all.

The People’s Bank of China, China’s central bank, has traditionally held about 10% of its reserves in gold – making it a global heavyweight in the precious-metals sector. But as that country’s overall reserves zoomed past the $2 trillion mark in recent years, the percentage of those reserves held in gold declined sharply. At the end of March, for instance, despite an increase in gold holdings to 1,054 metric tons, the yellow metal still only represented 1.5% of China’s reserves.

Going For Gold

China’s central bank, which has expressed ongoing concerns about the performance of the U.S. dollar, suggested that “the need to perfect foreign-exchange policies in the gold market is clear.” Granted, that statement could be construed to mean just about anything. But the odds are very good that Beijing will push for the purchase of more gold in the months to come.

While China will attempt to add to its gold holdings without disrupting the global metals market, even a cursory look at the mathematics of the world market for the yellow metal underscores that Beijing faces a real challenge.

First, understand that the annual output of all the world’s gold mines is only about $110 billion. Second, the value of all the gold ever mined is only about $6 trillion. The upshot: A major reserves holder like China can very easily disrupt the market, causing prices to “spike” uncontrollably.

That doesn’t include the possible market impact of a nation with 1.3 billion potential investors – a potential market impact that isn’t difficult to picture.

While the gold policies of China’s central bankers may be somewhat inscrutable, the growing interest the Chinese people have in gold and other precious metals is out in the open.

In 2009, Chinese investors bought 73 metric tons of bullion, with a value of about $2.6 billion at today’s prices. That total – 73 metric tons – is not, in itself, a huge amount of gold; Indian investors bought 147 metric tons, or twice that amount – in this year’s first quarter alone.

However, there’s an increasing acceptance of gold as an investment that’s washing across China, and that cannot be discounted. For example, the 73 metric tons of bullion bought by Chinese investors last year was more than four times the 18 metric tons that same group bought just two years before.

The increasing acceptance of gold-based investment by the huge Chinese pool of retail investment capital cannot fail to put upward pressure on prices. And Beijing seems to be making certain that this pressure is brought to bear.

Profiting From China’s Muscle

China opened the door on gold investments to retail investors last year; by the third quarter, Beijing was actively encouraging retail investors to make investments in gold and silver.

In the past, Chinese authorities have encouraged Chinese citizens to invest in gold as an alternative to the very speculative Chinese stock markets and the over-leveraged real estate market.

Gold is becoming a much-more-mainstream investment option. China’s leaders have increased the number of banks allowed to deal in bullion and increased the ability to purchase gold-linked investment products by using yuan, instead of U.S. dollars or some other foreign currency.

If Chinese investors become serious buyers of gold, their purchases are likely to be contra-cyclical to China’s stock market – and, thus, to global stock markets as a whole. When, as in 2006 and 2009, the Shanghai and Shenzen stock markets are soaring, domestic speculation pushes prices to extreme levels. Those money flows are likely to switch to gold if Chinese stock markets continue to lose ground.

Moreover, the large pay increases awarded to many Chinese workers in foreign-owned plants –such as the 30% award to the 300,000 workers in the Foxconn International Holdings (PINK ADR: FXCNY) plant – must inevitably push up both Chinese purchasing power and Chinese inflation.

The “official” inflation rate was only 2.9% according to government figures released in June, but China’s official inflation figures traditionally understate the reality. While silver – and not gold – has been the historical inflation hedge in China, an uptick in inflation will no doubt fuel an upsurge in gold purchases. That’s especially likely given that it is technically illegal for Chinese citizens to purchase foreign currencies. Besides, Chinese investors have learned to distrust both the U.S. dollar and the European euro.

For the rest of us, this has to translate into a bullish outlook for gold. And that means the recent decline that saw the yellow metal sell off and fall as much as 8% from its all-time high (it’s now down about 3%) must be regarded as no more than a temporary hiccup.

There are three possible approaches to buying gold you might look at. One is to buy the SPDR Gold Trust Exchange-Traded Fund (NYSE: GLD), which tracks fairly closely the performance of the metal itself. A second is to buy shares in gold mines, or possibly the gold mine ETF, the Market Vectors Gold Miners ETF (NYSE: GDX).

The third possibility – which features both the biggest potential risk and the most intriguing possible payoff – would have investors play the possibility of a true ‘spike” in gold prices through the purchase of a long-dated gold call option, perhaps one of those traded by the Chicago Mercantile Exchange on gold futures (see the “Actions to Take” section that follows).

News and Related Story Links:

• Money Morning:
  How China became the ’800-Pound’ Gorilla in the Gold Market.
• MineWeb.com:
  2009′s Top Story: China pushes silver and gold investment to the masses.
• Shanghai Stock Exchange:
  Official Website.
• Shenzhen Stock Exchange:
  Official Website.
• Money Morning Special Report:
  Why China’s Foxconn Will Hurt the Global Economy More Than the BP Oil Spill.
• Bloomberg News:
  China Tops Japan as World’s No. 2 Economy.
• Money Morning News Analysis:
  China Leapfrogs Japan and is Now the World’s No. 2 Economy – And is Gunning for the No. 1 United States.
• CME Group:
  Official Website Area for Gold Futures.

Trouble on the Home Front?

The U.S. recovery appears to have slowed to a crawl – or perhaps even ground to a halt. The “advance” estimate of U.S. second-quarter growth was reported at 2.4%, indicating a long road to recovery – during which unemployment is likely to remain far too high.

Almost half of the quarter’s gross-domestic-product (GDP) growth projected for the second quarter was inventory buildup. Government spending and a temporary housing blip – caused by the homebuyer tax rebate, which expired April 30 – accounted for the rest.

June durable goods orders, reported July 28, were unexpectedly down 1%, suggesting that even manufacturing is currently slowing. Add to that weak consumer confidence numbers for July and house sales well below expectations for both May and June, and it becomes clear that there’s cause for concern on the domestic front.

While inflation does not seem to be an immediate problem, unemployment remains appallingly high. That’s especially true of long-term unemployment, which – at 4.6% of the working population – is at a post-World War II record. The federal budget deficit is hovering at roughly 10% of GDP and interest rates remain close to zero, thanks to polices that are looking increasingly eccentric when compared to the routes that other countries have chosen to pursue.

It looks as if the U.S. economy will be dealing with the “Great Recession” for a long time to come. But most of the world’s other major economies are experiencing fairly rapid recoveries, meaning that they are putting the “Great Recession” firmly in the rearview mirror.

Searching For Growth

Cast your eyes away from the United States, however, and the picture becomes much brighter. Canada posted first-quarter growth of no less than 6.1%, and its budget is almost in balance. Even sluggish Britain expanded at 4.5% in the second quarter, and its heroic effort to balance its budget will undoubtedly help growth going forward. German industrial production was up 12.4% in the 12 months through May.

In fact, the overall Eurozone is safely into a growth mode – although its overall budget deficit is still dangerously high. The Economist estimates that shortfall it will reach 7% of GDP this year.

Turning to Latin America, we see that Mexico is something of a basket case. But Brazil is expected to grow at 7.8% this year, with Chile not far behind at 5%. Meanwhile, China is projected to grow at 9.9% in 2010, India at 7.9%, and wealthy South Korea at 5.9%. Even sluggish Japan will manage 3.1% growth.

The bottom line: The wise investor will allocate most of his money internationally.

Modest quantities should go into Europe – particularly Germany and Britain, where valuations are reasonable and growth prospects good. Some should go into Canada, China, Brazil and Chile – each of which have natural-resource-based economies. Canada and Chile also will benefit from having thoroughly reliable governments.

A large proportion should go into Asia: A little into Japan, where prospects appear somewhat brighter than they did a few months ago, and a substantial amount into China. Somewhat less should go into India, where valuations are too high and there are signs of inflation. Finally, a substantial chunk should head for South Korea, which boasts good growth, stability and a capable government.

America: The Global Growth Beneficiary

It’s important to remember that prospects for the U.S. economy are not universally gloomy.

The bad news is that the Obama administration and the U.S. Federal Reserve are together following the policies that Japan has followed for the most of its last 20 years, prolonging recession and producing dangerous bouts of deflation. (While I don’t agree with Federal Reserve Chairman Ben S. Bernanke’s excessive fear of deflation, there is no doubt that prolonged or steep bouts of deflation can be damaging, because they discourage investors from holding anything other than cash.)

There are, however, two bits of good news. The first is that U.S. policies may change. Bernanke will man his post until January 2014, so rapid change in ultra-low interest rates can’t be expected. However, the movement towards budget balancing is gathering strength in both political parties, and it seems likely that fiscal discipline will be restored once the new Congress takes office in January – following the midterm elections. If the budget is brought towards balance, as is happening in Britain, resources are freed up for the private sector and economic growth becomes easier.

The second, bigger piece of good news – not noticed by those who fear a Japanese “Lost Decade” type of future – is that the U.S. position differs from Japan’s in one important respect: Whereas Japan has always had a large balance-of-payments surplus, the United States currently has an enormous balance-of-payments deficit.

The United States has a huge advantage when world economic growth is strong, as is currently the case. With export markets growing faster than domestic consumption, exports will tend naturally to increase faster than imports, producing the most pleasant of all economic states – export-led growth.

Japan couldn’t grow its way out of its malaise, because its huge international reserves made the yen too strong, intensifying deflation. Furthermore, foreign countries became disquieted by Japan’s surpluses and erected hidden trade barriers against Japanese imports.

Of course, in the U.S. case, rapid growth in exports would reduce global imbalances, not increase them. The U.S. balance-of-payments deficit would decline, reducing its need for foreign funding. That would make the world economy more stable and increase its intrinsic growth rate. But it wouldn’t push up the dollar, because the balance of payments would still be in a deficit.

Provided that stern action was taken to rein in the budget deficit, U.S. economic growth would accelerate and unemployment would decline. If the budget deficit remained huge, there wouldn’t be so much money coming in from abroad, meaning domestic savers would be forced to buy U.S. Treasuries. That would force up interest rates and restrict the flow of funds to private-sector borrowers.

On balance, U.S. investors should be optimistic for 2011 and beyond. Rapid global growth should rectify the U.S. balance-of-payments problem, so that even modest fiscal discipline will produce a quickening of U.S. growth rates, and a full economic recovery.

Thus, we don’t need to emigrate in search of a better economy. But until the U.S. economy actually does turn around, our money should take an overseas vacation.

Actions to Take: Until the U.S. economy starts to show some real signs of life, U.S. investors need to up the ante on their overseas holdings – especially in such countries as China, Korea, Germany, Chile, Brazil, Canada and Britain.

News and Related Story Links:

• Money Morning News Archive:
  Midterm Elections.
• Money Morning:
  How to Profit From a Slowing U.S. Economy In the Second Half of 2010.
• Money Morning:
  A V-Shaped Recovery? Don’t Bet On It.
• Money Morning:
  Canada’s Economy Casts a Long Shadow Over its U.S. Counterpart.
• Money Morning:
  How to Profit From Europe’s Stealthy Resurgence.
• Wikipedia:
  Balance of Payments.
• Money Morning News Archive:
  Lost Decade.

The Birth (and Rebirth) of ‘The BRICS’

It’s been almost a decade – 2001, to be exact – since Goldman Sachs Group Inc. (NYSE: GS) economist Jim O’Neill conceived the “BRICS” acronym as a marketing vehicle that would convey the exciting investment potential of four key emerging markets (Brazil, Russia, India and China).

O’Neill is back – with a new list and a new acronym: The “CIVETS.” Given how much money investors have made from the BRICs, that suggests the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) deserve a closer look. Potentially, they may be the great growth markets of the new decade – or not!

O’Neill’s thesis is that growth is now spreading beyond the BRICs, whose stock markets have been pretty heavily explored at least by institutional investors, and that the CIVETS economies are the next chunky economies where growth seems likely and there is money to be made. Personally, I would buy Chile before any of them. But I suppose O’Neill would complain that the Chilean market was not big enough for the titanic wealth of Goldman Sachs!

The CIVETS Magical Mystery Tour

So allow me to lead us on a tour of the CIVETS markets, during which I will actually rate the profit potential (in standard Wall Street style), and will even expose any pitfalls that could render that potential moot.

Our CIVETS tour begins with Colombia, which looks like an excellent candidate for future growth. In fact, I said as much to Money Morning readers just last month, mere days after the voters confirmed center-right candidate Juan Manuel Santos (whose resume includes degrees from Harvard, the Fletcher School of Law and Diplomacy and the London School of Economics) as its new president. With 44 million people and a gross domestic product (GDP) of $231 billion, Colombia is certainly big enough to be worth considering. In a world in which resources prices are likely to trend upwards because of Chinese and Indian demand, I like the country’s agricultural and natural-resources orientation. What’s more, should the U.S. Congress ever actually ratify the U.S.-Colombia Free Trade Agreement (signed all the way back in November 2006), there should be a further boost to the Columbian market. The Economist‘s panel of forecasters projects growth of 2.5% this year and 3.8% in 2011. But that looks much too low to me. The projected 2010 budget deficit equal to 3.9% of GDP and the payments deficit of 1.6% of GDP look reasonable, as does the 2.6% inflation rate. The market’s Price/Earnings (P/E) ratio is 19.5, which is a little high. But when you sum it all up, Colombia is a “BUY.”

Indonesia is another country I have liked for a long time, particularly under its current, competent government of Susilo Bambang Yudhoyono, in power since 2004. With 243 million people and a GDP of $521 billion, it’s a substantive-enough economy to invest in. It’s well diversified, with agriculture, natural resources and substantial manufacturing. The level of corruption in the society is too high to be comfortable, but it remains lower than Russia. And it’s strategically situated between China and India, meaning it should benefit as both those behemoths grow. The Economist is pretty optimistic about growth, with forecasters calling for a 5.6% advance this year and 5.9% next year. The budget deficit is a reasonable 2.1% of GDP, and the current account is in surplus. With a P/E of 18, Indonesia’s stock market – like the aforementioned Colombia – is a bit pricey. Even so, Indonesia is definitely a “BUY.”

Vietnam is hailed as the next China. And with good reason: Vietnam has a culture that’s similar to the Red Dragon, it’s an ex-Communist, one-party state, and attracts foreign investment because of its cheap labor costs. Vietnam has a population of 90 million, but a GDP of only $92.4 billion. The problem here is that the old East Asian route to riches of cheap manufacturing is pre-empted by the behemoths China and India, so Vietnam may find it much more difficult to succeed than its East Asian predecessors did during the half-century that spanned 1950-2000. The Economist is optimistic about Vietnam’s growth prospects, predicting a 6.2% advance in 2010 and 7.0% in 2011. But the budget deficit is substantial at 7.7% of GDP, as is the payments deficit at 7.8% of GDP. Also highly worrisome: The inflation rate is expected to exceed 10%. Given that the stock market is small and highly speculative, and it’s very difficult for a U.S. investor to buy directly, I wouldn’t rush in too fast here. Still, keep an eye on this market: Vietnam is currently a “HOLD/BUY.”

Egypt makes the CIVETS acronym work nicely, but I can’t see why you would regard it as a growth economy. What’s more, it is essentially a one-party dictatorship in which the dictator – Hosni Mubarak – is 82. With 80 million people and a GDP of $190 billion, Egypt is surprisingly poor – especially given its geographical location close to Europe. The Economist expects this country to grow at 5.2% in 2010 and 5.4% in 2011 (but with population growth of a full 2% annually, that’s less impressive than it looks). The economy is heavily government controlled, and has few natural resources, given its excessive population. With a budget deficit of 8.7% of GDP, a payments deficit of 3.7% of GDP, an expected inflation rate of 12%, and an 82-year-old dictator, this market just doesn’t look attractive to me. Thus, I must say that Egypt is currently an “AVOID.”

Turkey is a pretty decent growth economy, albeit without many natural resources. But it now faces significant political risk. With 78 million people and a $608 billion economy, Turkey is (economically speaking) the largest of the CIVETS. In office since 2002, the current government of Recep Erdogan has done a good job on the economy. The Economist‘s forecasters say Turkey will grow at a 4.8% clip this year and another 4.0% in 2011. But that looks low – especially given that first-quarter growth ran at an annual rate of 11.7%. The budget deficit is 4.5% of GDP, the trade deficit 4.8% of GDP and inflation is expected to run at 10.1% in 2010. Also a concern: The public debt/GDP ratio – while well below its 2002 levels – is at 46%. Turkey has two possible paths down which it may travel, but they represent very different outcomes to investors: One is an opportunity, the other a danger. The opportunity is that Turkey finally gets a really decent free trade agreement with the European Union (EU) – without full membership – that allows it to manufacture for tariff-free sale throughout the EU market. The danger is that Erdogan reorients Turkish foreign policy towards the economic deadbeats of the Middle East. That makes Turkey a high-risk proposition. But the Turkish market’s P/E is only 11. It’s speculative, but on the whole I have to say that Turkey is a risky “BUY.”

South Africa is another resource-rich economy, which I believe to be a better basis than cheap labor for market emergence in the 2010s. With 49 million people, a barely growing population, and a GDP of $280 billion, South Africa is a decent-sized economy. However, Economist forecasters have it growing at a rate of only 2.8% in 2010 and 3.7% in 2011. With a budget deficit of 6.3% of GDP, and a payments deficit of 5.0%, this country’s finances are unattractive – even with the fact that The Economist expects inflation to run only at a tolerable 5.8%. The problem is management: The post-1994 South African governments have not shown they can run the economy well, in spite of South Africa’s resource advantages. What’s more, the Gini coefficient of inequality is 65 – the world’s second highest – which makes the society highly unstable. The market’s not cheap, either, given its P/E of 16. You may want to dabble in a gold mine or two, but even there the risks are less in places like Canada and the better bits of Latin America. For me, South Africa is too risky – and is a “HOLD,” at best.

All the BRICs would have made investors good money in the 2001-2010 time frame. Even so, I would have invested neither in Russia under Vladimir Putin, nor in Brazil until about 2006: The risks in both places were too high for the rewards. But I would have invested modestly in China as far back as 2001. And I did invest – very profitably – in India.

Like the BRICs, the CIVETS don’t offer a sure-fire recipe for investment profits. All the same, I think we’d be foolish not to look at possibilities in Colombia and Indonesia, and perhaps even Turkey, for now. And don’t forget about Vietnam, which will be very interesting when it opens further.

News and Related Story Links:

• The Permanent Wealth Investor:
  Official Website.
• Money Morning News Archive:
  BRICS News.
• Money Morning Special Research Report (Part I of II):
  Special Report: Hit the BRICs for a Global-Investing Double Play.
• Money Morning Special Research Report (Part II of II):
  Special Report: Hit the BRICs for a Global-Investing Double Play.
• Wikipedia:
  The BRICS.
• Wikipedia:
  Jim O’Neill.
• Wikipedia:
  Civets (the African Mammal).
• Reuters:
  After BRICs, look to CIVETS for growth – HSBC CEO.
• Money Morning News Analysis:South Africa Takes Aim at Both Short and Long-Term Goals with World Cup Bid.
• Money Morning Global Markets Tour:
  Four Ways to Profit From the World’s Shrewdest Government.
• Money Morning Global Markets Tour:It’s Time to Invest in Chile and Colombia – Latin America’s Reigning ‘Good Guys.’
• Office of the U.S. Trade Representative:
  Columbia FTA Pending Congressional Approval.
• Wikipedia:
  Hosni Mubarak.
• London School of Economics and Political Science:Official Website.
• Wikipedia:
  Gini Coefficient.
• The Fletcher School of Law & Diplomacy:
  Official Website.
• Money Morning Global Markets Tour:
  Despite Talk of a Bubble, Indonesia Is Still a Profit Haven for Investors.
• Wikipedia:
  Susilo Bambang Yudhoyono.
• Wikipedia:
  Recep Erdogan.
• Money Morning News Analysis:
  The Global Double-Dip Recession: Which Markets to Hold… And Which Ones May Fold.
• Money Morning Global Markets Tour:
  Six Ways to Invest in Korea – Asia’s Can’t-Miss Market.