A cynic could be forgiven for thinking that when everything in the land of risky stuff (equities) is rising, then the last refuge of the adventurous optimist has to be frontier markets. Back in 2007 and early 2008, I remember writing about opportunities in Africa, thinking that maybe, just maybe, this was a bit too adventurous for a market wobbling on the edge of irrational exuberance.
So it proved. As equity markets plunged, frontier markets vanished off the radar. They were hammered in 2009 and didn’t recover until fairly late in the day, in 2011. But the turnaround has been extraordinary. Over the last 12 months, the MSCI Frontier Markets index has shot up by 20%, compared to just 12% for the Emerging Markets index. Is this the last hurrah of global stock markets?
Maybe. But I think the cynicism is overdone. Frontier markets are in a similar state to emerging markets in the early 1990s. The likes of Qatar, Indonesia and Nigeria are arguably better risks than today’s big emerging markets – Brazil, Russia, India and China (the Brics). Valuations for many frontier markets are low, with single-digit price/earnings ratios and ample dividend yields not uncommon, while corporate and political governance is improving in leaps and bounds.
Stockmarkets in countries such as Indonesia (a frontier country) and Colombia (an emerging market, but seen by many as a frontier state) have doubled and trebled over the last decade as markets have opened up and foreign investors flooded in. The key for me has been this increasing market access and liquidity – illiquid assets typically are much more volatile, especially when investors get nervous about risk.
There’s something for every kind of investor in frontier markets. For cautious, value-orientated types, many frontier markets and stocks look reasonably valued, especially given the sound prospects for nations such as Indonesia or Mongolia. Growth investors can also find huge opportunity, as the local middle classes become increasingly empowered.
In all, I’m cautiously optimistic. I’m happy to remain invested for a five to ten-year time frame, looking to capture the sort of growth that emerging markets experienced in the 1990s and the noughties. Along the way there’ll be a huge amount of volatility and many setbacks as promising countries trip up, but I think that a small exposure to frontier markets makes sense.
The frontiers to focus on
Three areas catch my eye. There are the second and third-tier ‘Asian upstarts’: Mongolia, Myanmar, the Philippines, Indonesia and Sri Lanka. Each of these markets and countries has its own internal dynamics, but I’d rather have my money in places like these (and more developed countries, such as Thailand and Malaysia) than in mainland China.
I’m also a big fan – over the next ten to 20 years – of certain countries in the Middle East and North Africa (Mena, in the trade), and especially the Gulf States. Qatar stands head and shoulders above its peers, but that optimism extends to troubled Tunisia, the UAE and even Iraqi Kurdistan.
Qatar and the UAE are being pushed forward by some obvious drivers (in Qatar’s case, natural gas in huge quantities for at least another hundred years). I simply cannot believe that their local stockmarkets won’t be dragged forward too.
Tunisia is a special case, with its ongoing political upheaval. But I believe this could be the country where an Arab economic renaissance eventually begins (though that may take some time).
Last but by no means least, Africa to me seems the great long-term hope. There’s a profound change underway. Anyone who visits the place regularly could only agree with a recent survey in The Economist, which concluded with an upbeat assessment that this time, it really is different.
Africa has always had the demographics (a growing number of economically able young people), the land, the resources and the opportunity. But until recently, it has never had the governance and infrastructure needed to punch at its weight. That’s changing.
I believe a 1% or 2% portfolio allocation to sub-Saharan Africa (SSA) is sensible for adventurous investors. In fact, I’m more optimistic about SSA than South Africa, where political tensions are likely to cause investors headaches in the next few years.
How to invest
But how can you buy into these regions? The Mena area is probably the trickiest of the three. I’d invest in just one fund right now – the Qatar Investment fund (LSE: QIF). This invests in firms in Qatar, notably its banks and large financial concerns. It’s a well-managed outfit with London-based directors and a clear mandate to invest in an economy that’s been growing at an average annual rate of 16.2% (adjusted for inflation) since 2005.
The trick is to turn that top-line growth into bottom-line investor profits. Focusing on banking seems the best way to do so – banks’ loan and asset books should expand at an equivalent rate to the real economy, boosting fees and profits.
There’s a bit more choice once we turn to the East Asian ‘second division’. Of the many funds targeting Vietnam, the Vietnam Opportunity Fund (LSE: VOF) is probably the most liquid and respected. But I’d be wary of Vietnam just now. It has similar governance and political issues to China, and perhaps too much foreign money swilling around its equity market.
Cambodia is more interesting, but it’s out of reach to retail investors, as is Myanmar. The most obvious indirect way to play these two is via Thailand. It has a well-developed stock market full of well-run firms that will be in prime position to benefit from the opening up of its two small ex-socialist neighbours.
Better still, there is a very well-regarded fund managed by Hugh Young’s team out of Singapore, called the Aberdeen New Thai investment trust (LSE: ANW), which seems ideally suited to benefit.
There’s also no direct way into the Sri Lankan stock market, nor the Mongolian one. But there is an indirect way into the latter’s booming economy (currently home to 16 different multi-billion dollar mining projects) through the London-listed, China-based private equity house Origo Partners (LSE: OPP).
This fund trades at a huge discount to net asset value and features a hefty investment in Mongolian projects, and two firms in particular, Gobi Coal and Kincora Copper. Origo has also announced it’s setting up a joint venture to tap into Myanmar.
Africa is probably the easiest market to access for UK investors. A small but growing number of retail funds invest some or all their investors’ money in the SSA area. My preference is for the Africa Opportunity fund (LSE: AOF), a closed-end fund run by veteran Francis Daniels. It invests in everything from African mobile phone operators, such as Sonatel, through to West African government debt.
You could also consider firms with diversified operations across the continent. Lonrho (LSE: LONR) is a fairly controversial conglomerate with interests in everything from agriculture to airlines. Other options include the businesses run by Phil Edmonds and Andrew Groves.
These two mining entrepreneurs know Africa well (they built up and sold on central African miner Camec). Their portfolio includes African Potash (LSE: AFPO), African Medical Investments (LSE: AMEI) and Agriterra (LSE: AGTA), a pan-African agriculture play that’s valued at just over its cash value by the London market.
This last tip is a direct way of playing three key trends: the growing African consumer market (eating meat); the growth of Mozambique as one of the heroes of economic development and relatively sound governance (through Agriterra’s big meat business in the country); and the general flood of money into African agriculture and land.
If this focus on specific countries, firms and funds seems too risky, there is an alternative: use a fund that makes all the active decisions for you. Two stand out as ‘diversified choices’, both listed in London. Advance Frontier Markets (LSE: AFMF) managed by Dr Slim Feriani and BlackRock Frontiers (LSE: BRFI) managed by Sam Vecht.
Advance invests in other funds, which focus on particular countries or regions, whereas the BlackRock fund invests directly in individual companies throughout the frontiers markets universe. Advance has a longer track record. It has beaten its benchmarks over the last five years, but currently trades at a chunky discount of 11%.
The BlackRock fund has a better one-year record, and trades at a premium of 0.7%. Adventurous types might be tempted to invest in both funds.
If you’re after a mutual fund, the best choice is probably the Templeton Frontier Markets Fund, which should be available on most individual savings account (Isa) and self-invested personal pension (Sipp) platforms, and is managed out of Singapore by well-known emerging-markets fund manager Mark Mobius.
Frontier fund tips
| Name | Ticker | Price | Premium/discount |
|---|---|---|---|
| Qatar IT | QIF | $0.92 | -13.2% |
| Aberd. New Thai | ANW | 588p | -1.3% |
| Origo | OPP | 13.1p | -62.5% |
| Africa Opportun. | AOF | 0.85p | -16.0% |
| Advance Frontier | AFMF | 51p | -11.4% |
| BlackRock Frontier | BRFI | 105p | +0.7% |