Frontier markets offer investment opportunities yet

Emre Akcakmak, Portfolio Manager per East Capital: “Frontier markets clearly benefit from improving risk appetite as this helps investors realize the long term potential of frontier markets as next generation emerging markets”

How do you evaluate the performance of frontier markets over the last 5 years? What minimum investment horizon do you suggest to an investor interested in the frontier markets’ asset class?
Despite a number of challenges coming from both on the global and domestic sides, majority of frontier markets have been performing relatively well without showing signs of major distress. However, it is not possible to draw a conclusion for the performance of the overall universe for longer time horizons due to two reasons. First, benchmark frontier indices change frequently due to upgrades and downgrades. Therefore, it is not possible to make apple-to-apple comparisons. For instance, the Middle East region which used to account for almost two-thirds of our benchmark MSCI Frontier Markets Index is now making only one-third of the index following Qatar and UAE’s upgrade to EM status in 2014. Second, frontier markets universe is very broad with 30+ countries from all over the world. Therefore, they all have significantly different dynamics and market performances to make general conclusions very difficult.
However, what is common and comparable to majority of frontier markets relates to your second question. We think that frontier markets make a great long term investment case due to ongoing convergence stories supported by reform processes, young populations, rise of the middle class and improvement in financial markets. Coupled with traditionally high dividend yields and attractive price-to-earnings ratio of 10.5x, ie. at 15% discount to emerging markets and 35% discount to developed markets, frontier markets make a great addition to overall diversified portfolios.

What are, in your opinion, the frontiers markets that could yield the most satisfactory results?
The way we approach to frontier markets is to invest in companies rather than counties. Therefore, we think it is a good idea to be on the ground, meet with the management of companies as frequent as possible and make investment decisions accordingly. Having said that, we are currently keen on markets like Pakistan, Vietnam, Romania and Argentina which offer good long term investment opportunities along with reform processes, high current or potential economic growth and significant consumer demand.

How do international markets’ fluctuations affect frontier markets’ performances? And what are the most important elements that impact on this asset class?
Frontier markets are certainly exposed to what is happening on the international markets via direct economic channels, investment flows or investor sentiment. However, these markets are so geographically diversified and their level of integration to the global financial system is yet so low that they are not as exposed as emerging markets are to global fluctuations. It is not uncommon to see a performance differential of 30-50% among frontier markets in a given year. Therefore, it is important to have a good understanding of the individual markets as well as individual stocks in this broad universe.
Accordingly, there is no single factor which is significantly more important compared to others. While developments in the Eurozone may be important for frontiers in Balkans and Baltics, political developments in Pakistan, foreign ownership limitations in Vietnam, reform processes in Argentina, oil price in the Middle East or currency outlook in Nigeria may be the key determinants of market performance. As an asset class, frontier markets clearly benefit from improving risk appetite as this helps investors realize the long term potential of frontier markets as next generation emerging markets.