Head to frontier markets for profits

Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Hedi Ben Mlouka, manager, Duet Frontier Fund.

Frontier markets represent 30% of the world’s population, 15% of its GDP, but a mere 3% of global stockmarket value. Yet, these are the only markets where the working population is likely to grow over the next 30 years, and where GDP growth is slated to outpace other markets over the next ten years. Today, seven out of the ten fastest growing economies in the world are frontier markets.

The rise of the middle-income consumer in frontier markets is probably the single most attractive opportunity globally in terms of consumer stocks. Global investors have recently woken up to the frontier opportunity, but they have been focused on companies with the largest market values. These firms aren’t necessarily cheap.

Investors have also been looking for comfort, investing in familiar names, such as Nestlé and Unilever affiliates in countries like Nigeria and Pakistan: great companies for sure, but plenty of other investors have had the same idea.

Opportunities lie in less well-known, local, mid-sized companies with a significant market share in their own market – such as Mouwasat (Riyadh: MOUWASAT).

Mouwasat is one of the largest and most profitable private hospital companies in Saudi Arabia and is well positioned to benefit from the structural shortage of health-care capacity in the country.

Saudi Arabian health care is expected to deliver substantial growth for well-managed private firms, thanks to favourable demographics, with 65% of the population being under the age of 30. So-called ‘lifestyle diseases’ are also prevalent in Saudi Arabia, which has one of the highest incident rates for diabetes and obesity in the world.

Moreover, the barriers to entry remain high because of restrictions on land ownership and scarcity of real estate, as well as a limited pool of local physicians. Mouwasat has an extensive land bank and an established international recruitment network that puts it in a great position to deliver on its expansion plans.

Another attractive company is Oriental Weavers (Cairo: ORWE). It is the largest machine-made rug manufacturer globally. Based in Egypt, the company benefits from robust local demand and it is also a key player in the export market – in fact, it is the largest supplier to global distributors such as Ikea.

The upside is likely to come from a strategy to expand margins by focusing on more profitable markets, such as the hospitality sector.

Finally, FCMB Bank (Lagos: FCMB) in Nigeria offers rare access to the country’s fast-growing consumer lending business (more than 60% of the adult population still does not have a bank account). The bank has created a subsidiary, Credit Direct Limited, that provides unsecured loans to its customers in 24 hours over 12 to 24 months.

Retail banking in Nigeria is profitable with a net interest margin in excess of 5%, and stands to grow at double-digit growth rates for years to come. FCMB trades at a cheap 0.5 times book value.

With frontier markets, it’s probably best not to worry too much about trying to invest at the most opportune time. These businesses are positioned in sectors and themes that are secular and unique to frontier markets, and will be there for the next 20 years: we just need to focus on investing in the best companies in this segment.

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