Investing in Newly Industrialized Countries (NICs)

These are important markets for international investors

An investor monitors the stock market on a tablet.
•••

goc / Getty Images

Newly industrialized country (NIC) is an economic term used to describe economies that fall somewhere between a developed country and a developing country. Those falling into this category are marked by rapid export-driven growth. They show a secular migration of workers from rural to urban areas.

China, India, and Brazil are NICs, although exact definitions of NICs can vary. The one thing most can agree on is that NICs tend to be nice investment destinations, given their strong growth rates. This attracts international investors.

Key Takeaways

  • NICs may have low living standards. But they also have increasing economic freedoms and personal liberty. They're moving from agriculture into manufacturing.
  • There is no single definition of a NIC, so economists can differ on which countries they include in this category.
  • China may be the largest NIC, along with other major NICs like Brazil, India, and South Africa.

Characteristics of NICs

Developing countries are often classified as those with a low living standard. They have an under-developed industrial base and a low Human Development Index (HDI) compared to other countries with more advanced economies. NICs share some of these traits. But they tend to be heading toward becoming freer and stronger developed market countries.

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

Many emerging markets fall under the NIC categorization. This differs from frontier markets that tend to be in a much earlier stage.

Many frontier markets still have unstable governments. This results in a higher level of political risk or dependence on a single industry.

Commonly Cited NICs

Investors commonly use the term NIC, but there is no single agreed-upon definition. Many countries are defined as NICs as a result. But not all agree on what these countries are. The classification can change quickly over time, depending on a country's economic conditions. Countries that have moved beyond NICs to developed countries in the 1970s and 1980s as their economies matured include Singapore and South Korea.

Some countries may also be demoted from NICs to frontier markets if their economies regress due to deteriorating economics or politics. Some countries have made strides in setting up democratic governments. They've then slipped when an autocrat takes power.

This lack of strength could result in a demotion of their economic status.

Investing Options

You have many options if you seek exposure to this fast-growing class of countries. The easiest way to invest here is with exchange-traded funds (ETFs) that offer broad exposure in a single security that can be easily traded on U.S. stock exchanges. This avoids the risks associated with trading on foreign exchanges.

Some NIC ETFs to think about include:

  • iShares MSCI BRIC Index Fund (BKF): Brazil, China, and India are three NICs, making BRIC ETFs like this one a good option.
  • iShares FTSE/Xinhua China 25 Index (FXI): China is the largest NIC, making this a large and popular ETF for those looking for exposure.
  • iShares MSCI South Africa Index (EZA): South Africa is one of the most non-correlated NICs, making this ETF a good option if you're looking to diversify.

You may also want to think about one of many country-specific ETFs, like the two for China and South Africa, or American Depository Receipts (ADRs) that target certain companies within these countries. ADRs are U.S.-traded securities representing fractional ownership in foreign equities that are traded on international exchanges.

Important Considerations

The term NIC is very broad and ill-defined, so be careful when using it. Many countries that fall into this category face many hurdles with their economic development. This would include China's economic struggles or Brazil's political turmoil in 2015 and 2016.

But NICs shouldn't be ignored. China is expected to become the largest economy in the world by 2028. India isn't very far behind. That makes these countries key for global growth. You should carefully build exposure to these areas while taking the risks into account.

The Bottom Line

NICs are key markets. They aren't as safe as developed countries. But they're much less risky than developing countries. They offer very nice growth rates. You should carefully analyze these options and build them into a diversified portfolio.

Article Sources