By Michael Levy
Economic growth is at a premium. With developed economies projected to expand at rates which are sluggish at best over the coming five to 10 years, and emerging economies no longer enjoying the rapid rate of expansion enjoyed a decade ago, many investors are wondering where next to turn.
We believe that frontier markets are set to be the next growth frontier. Whether investing in the equity markets of Nigeria and Kenya, or further east in a vibrant Vietnam or Cambodia, we believe frontier markets represent a compelling investment proposition for experienced investors who are aware of the risks associated with holding equities in these markets.
Frontier equity markets have performed strongly in recent months, with the MSCI Frontier Markets index rising by 8.2% in US dollar terms over the first quarter of 2013. In contrast, the MSCI Emerging Markets index has declined by -1.6%, while the MSCI AC World index has risen by 6.6% in the same period.
As we view markets today, we are particularly positive on areas such as the financials sector in Kenya. Here, we favour commercial banks that enjoy good access to a generally under-financed population. In our view, the political climate in Kenya appears to have settled following the victory of Uhuru Kenyatta – the son of Jomo Kenyatta, Kenya’s first president – in last month’s presidential election.
We also like the fact that Kenya is viewed as financial hub and a gateway into East Africa. It has good infrastructure, solid technology and represents an interesting access point to the likes of Tanzania and Ethiopia.
Staying in sub-Saharan Africa, Nigeria is another country where financials are benefitting from not only favourable demographics in the form of a growing middle class, but also supportive monetary policy from the central bank.
The rise of the Nigerian consumer is an important long-term theme and we favour domestic firms that know the market and have exposure to rising discretionary spending in consumer-related sectors. Nigerian Breweries is a good example of such a firm, in our view.
A number of frontier markets within the Middle East also provide investors with the potential for positive long-term growth and attractive investment returns. In our view, drivers that can help this trend over time include rapid population growth, an active and affluent middle class, a supportive oil price environment, and signs that the political situation is starting to recover and stabilise.
We like Saudi Arabia and we believe there are a number of stock selection opportunities in the telecom, healthcare, consumer and infrastructure sectors – where the government has announced its intention to increase spending in order to help support growth over the medium and longterm.
In the case of the United Arab Emirates (UAE), we continue to see a strong economy built on largely excellent infrastructure. In addition, tourism and real estate in the UAE have benefitted from strong inflows from nearby markets and from further afield such as Asia and this has been generally encouraging for companies linked to these sectors. DP World is good example of a company which has benefitted from the UAE’s status as a shipping hub for the region and has strong linkages to the global marketplace.
In Asia, Vietnam and Cambodia are two attractive nascent markets and show, in our view, the classic characteristics of frontier markets. Companies like Vietnam Dairy Products, for example, benefit from the changing dietary habits of many consumers in this part of the world.
In Cambodia, we favour companies that have the products and services desired by an increasingly wealthy consumer base not just in fast-growing Phnom Penh, but in neighbouring Vietnam, Korea and China. NagaCorp, a hotels and casino company, is a good example of a local business benefitting from strengthening flows of foreign tourists.
Given the fact that frontier markets are typically under-researched and overlooked by the wider investor community, we believe these economics offer interesting and rewarding opportunities for experienced investors across a range of geographies and industries.
Michael Levy is investment manager at Baring Asset Management
Comments