Frontier markets are typically characterized by reform processes, high economic growth and young populations.
However, they are frequently misunderstood and overlooked by international investors as information is scarce and markets are often small. This is partially why their performance has recently been lagging behind the one of both developed and emerging markets. However, we think that the situation is improving now with investor appetite gradually coming back.
Key frontier markets such as Pakistan and Argentina are good examples of how things may develop when political stability is established, reform processes accelerate and prospects of an upgrade to an emerging market status get stronger. Both markets are up around 20% in USD terms this year with Pakistan about to be included into MSCI Emerging Markets Index in 2017 and Argentina being up for a review for future inclusion. Otherwise, the uninterrupted economic growth we witness especially in Asian frontiers such as Vietnam and Bangladesh also contribute to the overall investment appetite towards the universe. It is another relief for investors to witness the majority of the expected currency movements being over with Argentina, Kazakhstan, Ukraine and Nigeria currencies losing as much as 50% of value vs. US Dollar over the past 2 years.
We find the frontier consumer story very interesting mainly due to growing populations and the rise of the middle class in these young markets. For this reason, we invest almost one-third of our Frontier Markets Fund in attractive consumer companies such as a biscuit producer in Bangladesh, a poultry producer in Ukraine, a food retailer in Saudi Arabia and an agriculture company in Argentina. We expect our consumer companies to post close to 20% earnings growth in 2017 compared to about 14% expected growth for the overall universe as represented by the MSCI Frontier Markets Index. As an indirect exposure to fast-growing consumer businesses and to overall economic growth, we also like banks in the broader universe from Sri Lanka to Mauritius and from Georgia to Nigeria. Despite a slower expected earnings growth in the range of 5-10% for 2017, majority of the frontier market banks are attractively priced below 10x expected earnings. Otherwise, fast growing healthcare companies and telecom companies with high dividend yields in the range of 7-12% are also among the sectors we like.
Emre Ackakmack – East Capital