Forget The BRIC, Your Portfolio Needs The TICK
Much has been made of the growth of the BRIC countries of Brazil, Russia, India, and China. But the fact remains that despite their impressive growth rates, all of these countries remain very poor relative to the developed world. For example, in the People’s Republic of China, more than one third of the population lives on less than $2 a day. In Brazil the figure stands at 18%, and an incredible 75% in India (PDF). These depressing figures indicate that the BRICs have a long way to go to reach developed status. While there are certainly great opportunities in the BRICs, there are also substantial risks.
Some degree of BRIC exposure should probably be included in almost every investor’s portfolio (see our complete guide to BRIC ETFs for a closer look), but many investors might be better suited tilting their international exposure to the “TICK” bloc of Taiwan, Israel, Chile, and Korea. These economies may be small, but they all pack an economic punch. All four are ranked between 25-50 on the Human Development Index (note Taiwan is not recognized by the UN but would rank 25th according to its statistics), and all have above world average GDP per capita (PPP).
These borderline developed markets present a compelling economic story – having proven they can grow but still with significant room for expansion into truly developed world. While most of the TICK (with the exception of Chile) can be considered “developed” by certain sources, these recognition are not universal, suggesting that there is still some debate about the level of development in these countries.
TICK vs. BRIC
As indicated in the chart below, the TICK bloc is nearly three times as rich, twice as highly-ranked on a leading competitive index ranking, and has a higher life expectancy and lower inflation and unemployment rates. While it is true that BRIC is growing twice as fast, the BRIC will need to grow at a 7% rate for roughly 16 years just to catch up to the TICK’s development level, assuming that the TICKs do not grow at all in that time period.
|HDI average ranking||30.5||93|
|Per Capita GDP (PPP) average||$25,475||$8,800|
|GDP per capita growth (last 5 years)||3.54%||7.01%|
|Average Inflation rate||5.48%||8.38%|
|Global Competitiveness Avg ranking||22||49.25|
|Life expectancy (in years)||78.69||70.345|
Another positive for the TICK: it is a bloc of purely democratic nations which will generally translate into reduced political and business risk relative to most emerging markets. Also, the small size of the TICK bloc may mean that it will be easier to raise living standards. Unlike the BRIC, which is comprised of four of the 10 most populated countries in the world, the TICK combines to have a population less than half of the United States. This makes governing much more manageable and reform much easier to implement.
The TICK can currently be accessed by 4 different country specific ETFs, all from iShares.
iShares MSCI Taiwan Index Fund (EWT)
Taiwan, one of the four Asian tigers, has proven it is capable of remarkable growth despite its isolation. While it is not recognized by the United Nations due to a lobby from the People’s Republic of China, this sanction hasn’t stopped Taiwan from seeking better ties with the mainland. Taiwan hopes to become the main jumping off point for companies that are looking to invest in mainland China but are still worried about massive state intervention and other communist party tactics that are prevalent in the PRC.
Taiwan plays a very important role in the technological world: it is a global leader in semiconductors, smart phones and is stepping up its biotechnology programs. Should consumer product sales see an uptick, Taiwan would be a main beneficiary, especially if consumer demand picks up on the mainland. Taiwan has also been very conservative fiscally, allowing it to escape the worst of the Asian financial crisis and has build up sizable foreign exchange and gold reserves. Currently its reserves stand at over $12,000 per capita, which will provide a nice cushion should any other financial crises hit the Republic of China.
EWT is heavily weighted towards information technology, with nearly 60% of the fund in the sector and almost 15% of the overall assets in Taiwan Semiconductor. The fund has a 0.73% expense ratio and has holdings in 125 Taiwanese stocks.
(For a recent look at the Taiwan ETF click here)
iShares MSCI Israel Capped Investable Market Index Fund (EIS)
Since Israel lacks the reserves of natural resources of its neighbors, the country has had to rely on innovation and technology to drive most of its growth. Israel is seeking to become a solar power leader in the region, which could lessen dependence on the actions of occasionally hostile neighbors. Israel has one of the highest rates of solar water heater usage, with almost 90% of the population heating their water this way (PDF). Israel also has “Silicon Wadi” or their version of Silicon Valley, which has become a high tech hub in the Middle East attracting companies such as IBM, Google, and Intel. Silicon Wadi has been described as the second most important center of innovation in the world, and with good reason. It has produced impressive technological feats such as Intel’s Centrino chip and the programing code PHP. Israel also has a very well educated workforce that are trained in technical skills, with a high level of engineers at 135 per 10,000 employees (well above America’s 70 per 10,000).
EIS is a well diversified fund, with five sectors comprising at least 10% of holdings. Financials and healthcare make up the two largest sectors at about 24% and 23%, respectively. EIS has an expense ratio of 0.63%, and pays out a dividend of just over 2%.
iShares MSCI Chile Index Fund (ECH)
The least developed of the four countries, Chile finds itself in a very unique position at the start of the 21st century. Its dependence on copper is still very high, but that isn’t necessarily a bad thing given the crucial role of the metal in the modern economy and its current price at just under $3 per pound.
Chile also uses a sovereign wealth fund in order to invest copper proceeds when prices are high and then spend this money in the economy when prices of the metal are low, ensuring a steady stream of income without significant deficit spending. Chile is seeking to diversify its economy out of minerals, and as such has very liberal foreign investment rules. Over the past five years, foreign direct investment inflows have quadrupled to some $17 billion in 2008. This has led to growth in the financial sector especially, as well as more manufacturing activities since Chile has also signed numerous free trade agreements throughout the world. Chile has come along way since its military dictatorship under Pinochet, and the country is now tied for 21st best in a recent study of government corruption (with Japan no less). Chile maintains by far the highest ranking for a South American country (Brazil is in 62nd place), indicating that this mountanous nation may merit consideration from global investors.
ECH is weighted heavily towards the basic industries with nearly 40% in basic materials and industrial stocks. The fund also has a significant weighting in utilities, which comprise almost 30% of the 33 stock portfolio.
Korea- iShares MSCI South Korea Index Fund (EWY)
South Korea is strategically located between the economic juggernauts of China and Japan. The country has a diversified economy, but its focus is clearly on high tech goods and electronics. Samsung, Asia’s largest maker of chips, TVs and mobile phones, reported solid earnings last week, tripling net income and delivering record profits. This is great news for the overall South Korean economy, as it suggests that consumers are getting out of their slump which will help Korea’s export driven economy. In fact, South Korea posted a strong 2.9% GDP gain in the third quarter and may even post a full year GDP gain for 2009.
South Korea has long been a hub of innovation and high tech knowledge; its people rank second in mathematical literacy and patents granted per million people, and first in scientific literacy (data from nationmaster.com). With this commitment to educational excellence, the South Korean economy looks to be in a great position to grow even more in the future.
EWY has nearly 30% of its assets in information technology firms (including nearly 20% in Samsung). While its dividend is minimal it has produced a 14.43% annualized gain over the past five years.
(For a recent look at the Korea ETF click here)
Like all investments, there is an element of risk that comes with investing in the TICK bloc. All four countries have their own unique economic challenges, as well as geopolitical issues that they must overcome in order to be universally recognized as developed nations. Due to their small size, many of the nations in the TICK are liable to be bullied by their larger and usually more aggressive neighbors. With the exception of Chile, the rest of the TICK has a hostile neighbor within striking distance of their homeland, clearly a significant risk to economic growth. Even for Chile, there have been somewhat chilly relations between itself and neighbors due to foot-dragging regarding the MERCOSUR pact (PDF) and continued resentment over the War of the Pacific.
Although the TICK bloc might not be as sexy as the BRICs, these four countries offer investors an excellent opportunity to achieve international exposure with relatively lower levels of risk. Think of the TICK as a high class BRIC, suitable for investors who want more diversification out of traditional developed markets but are not completely sold on the prospects of the giant BRIC nations. And for more ETF ideas, make sure to sign up for our free ETF Newsletter.
Disclosure: No positions at time of writing.