EMERGING FX VIEW-Investors may trade off BRIC for VISTA

Fri Jul 13, 2007 12:42pm EDT

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(EMERGING FX VIEW is a regular column addressing the latest emerging market foreign exchange trends, events and participants.)

By Vivianne Rodrigues

NEW YORK, July 13 (Reuters) - Move over BRIC. Here comes VISTA.

As returns shrink on trades in BRIC economies -- Brazil, Russia, China and India -- some emerging market investors are targeting a new group labeled VISTA.

The VISTA countries include Vietnam, Indonesia, South Africa, Turkey and Argentina. Some of its members, such as Argentina, Turkey and South Africa, have long been household names in emerging markets portfolios.

But the relatively untapped potential of countries such as Vietnam is only now beginning to come under global investors' radars.

"VISTA brings these emerging markets to a new level in the asset class debate," said Paresh Upadhyaya, a global currency manager at Putnam Investments in Boston, with holdings in emerging markets.

"VISTA is quite a catchy acronym and it may very well mean that we are beginning to enter into a second wave of mass cross-border and mass cross-asset investment into this group of smaller emerging market countries," said Upadhyaya, who manages around $30 billion in currency exposure.

What helped transform BRIC from just a simple acronym into a investment strategy, he said, was a combination of similar fundamentals among the countries and the potential for rapid economic and capital markets' expansion, at a time when global investors were becoming disenchanted with low returns in U.S. assets.

In fact, the term BRIC was first used in an economic paper by analysts at Goldman Sachs in 2003. The gist of it was BRIC economies were developing at a pace that by the year 2050 would allow them to eclipse most of the richest countries of the world.

"A couple of years ago BRIC became, and maybe still is, a fever among both global and dedicated emerging market investors," said Clyde Wardle, an emerging markets strategist at HSBC Bank USA in New York. "But given the returns and the fundamentals of some of the VISTA economies, instead of a second wave, this may just be a second-tier group."

Returns in VISTA countries have yet to reach levels that justify the higher risk and volatility inherent to their local markets, strategists said.

In the case of VISTA currencies, for example, the Turkish lira TRL=, has gained 11 percent versus the U.S. dollar year-to-date, while the South African rand ZAR= rose a slight 0.6 percent. The Argentine peso ARS= slid 1.3 percent versus the U.S. dollar.

That compares with an almost 13 percent gain in the Brazilian real BRL= in 2007 and a 9 percent advance in the Indian rupee INR=.

But now may be a good time to get in early to some of the higher risk countries.

"Obviously the returns in some of these (VISTA) countries are better than in the U.S., Europe and Japan," said Samarjit Shankar, director for global strategy at Bank of New York Mellon in Boston, with assets in emerging markets.

"But there's a reason why returns are higher: that's because risks are also higher and when you are competing with Brazil and Russia, where the local markets are very sophisticated, I'm not sure if the trade pays off."

Shankar said his favorite emerging market is still Brazil, but among VISTA countries Vietnam is still the country with the highest potential.

"Vietnam seems to be the one with more room for growth and that may attract the early investors," said Shankar. "But I'm still not fully convinced about VISTA as a unified emerging market strategy."

Wardle at HSBC shares a similar view. He still recommends investors to hold Brazilian, Indonesian and Turkish assets, while paring holdings in Argentine pesos. Most VISTA countries are prone to volatility, speculation and political risk, he said.

"VISTA countries have very little in common and it just shows how hungry people are for yields," Wardle added. "There's a feeling among many investors that they have to be in exotic places if they are to make money, especially if it seems everybody else is doing it. It's an easy marketing ploy. But not everybody has the depth of knowledge some of these markets require in times of crisis."

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