The Best Ways To Invest In Newly Industrialized Countries

The term “newly industrialized country” (NIC) is an economic classification used by economists to describe economies that fall somewhere between a developed country and a developing country. Countries in this category are characterized by rapid export-led economic growth and secular migration of workers from rural to urban areas.

Some examples of NICs include China, India, and Brazil, although definitions of NICs vary among economists. What most economists can agree on is that NICs tend to be attractive investment destinations due to their strong economic growth rates, which makes them highly valuable to international investors.

Characteristics of NICs

Developing countries are often classified as having a low standard of living, an underdeveloped industrial base, and a low Human Development Index (HDI) relative to other countries with more advanced economies. The NICs share some of these characteristics but tend to be heading in the direction of becoming a freer and stronger developed market country.

Some common attributes seen in NICs include increased economic freedoms, increased personal freedoms, a transition from agriculture to manufacturing, the presence of large domestic corporations, strong foreign direct investment, and rapid growth in urban centers as a result of migration from rural areas to larger and larger areas. populated city centers.

Many emerging markets fall under the NIC categorization, unlike frontier markets which tend to be at a much earlier stage. For example, many frontier markets still have relatively unstable governance that implies a higher level of political risk or reliance on a single product or industry.

Commonly cited NIC

Economists and investors often use the term NIC, but there is no single agreed definition. As a result, many different countries are considered NICs, but not everyone agrees on what those countries are. Furthermore, the classification can change rapidly over time, depending on the economic conditions in a country. Countries that have moved beyond the NICs to developed countries in the 1970s and 1980s include Singapore and South Korea, as their economies have matured.

Some countries may also be downgraded from NIC to frontier markets if their economies have regressed due to a deteriorating economic or political environment. For example, some countries have come a long way in installing a democratic government but failed with an autocrat taking power. The lack of strength in its institutions could result in a deterioration of its economic situation.

Investment options

International investors seeking exposure to this fast-growing country classification have numerous options. The easiest way to invest in these countries is through the use of Exchange Traded Funds (ETFs) which offer broad exposure to these economies in a single security that can be easily traded on US stock exchanges without the risks associated with foreign exchange trading. Some NIC ETFs to consider include:

IShares MSCI BRIC Index Fund (BKF)

Brazil, China, and India are three NICs, so BRIC ETFs like this one are a good fit.

IShares FTSE/Xinhua China 25 Index (FXI)

China is the largest NIC, making it a large and popular ETF for those seeking exposure.

IShares MSCI South Africa Index (EZA) 

South Africa is one of the least correlated NICs, making this ETF a good choice for investors looking to diversify.

International investors may also want to consider one of the many country-specific ETFs, such as the two mentioned above for China and South Africa, or American Depository Receipts (ADRs) to target specific companies within these countries. ADRs are US-traded securities that represent fractional ownership in foreign stocks traded on international exchanges.

Important considerations

The term NIC is very broad and poorly defined, which means that international investors should be careful when using it. Many countries that fall into this category also face numerous obstacles associated with their economic development, such as China’s economic struggles or Brazil’s political turmoil in 2015 and 2016.

However, NICs should not be ignored. China is expected to become the largest country in the world in the next 50 years, while India is not far behind, making these countries very important for global growth. International investors should carefully build exposure to these areas in their portfolios, taking into account the risks.

The bottom line

NICs are important markets for international investors. While not as safe as developed countries, they are significantly less risky than developing countries and offer compelling growth rates. Investors should carefully analyze these opportunities and build them into a diversified portfolio.

The Balance does not provide tax, investment, or financial advice or services. The information is presented without regard to the investment objectives, risk tolerance, or financial circumstances of any specific investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing carries risks, including possible loss of principal.