Frontier Markets

Two new articles focusing on frontier markets.  The first, courtesy of The Financial Times, looks at some of the positive attributes of these investment opportunities:

“There’s a clue in the name: rugged, mostly unexplored, and potentially treacherous. Yet if the reasons to raise allocations to emerging markets are still intact in 2011 – low yields and low growth in developed economies, combined with plentiful liquidity – then “frontier markets” should benefit from trickle-down effects. As defined by MSCI, these markets outperformed emerging markets this year, gaining 16.5 per cent, against 12.3 per cent. But their overall recovery from the crisis has been far less spectacular, thanks to the lack of foreign capital.

Take Bangladesh, where foreign investors own just 5 per cent of the stock market, compared to about a third in South Korea or Thailand. If institutions needed justification for their decision to steer clear, Sunday’s 7 per cent plunge in the Dhaka market – the steepest one-day fall for five years – would have provided it. But once calm is restored, foreigners should aim for a more sophisticated take than “here be monsters.” Yes, Bangladesh has all the problems of a low-income country – poor infrastructure, bureaucracy and corruption – along with high inflation and a weak currency. But its vast pool of cheap, young labour means that it stands a good chance of replicating its success in clothing in other light manufacturing and service sectors: Bangladesh has built the world’s biggest ship-breaking business from scratch over the last 30 years, for example. Unlike Southeast Asia in the early 90s or India today, its transition to a middle-income country is entirely unreliant on foreign financing or portfolio flows.”

The second – via The Street – notes how renowned investor, Mark Mobius, is evaluating frontier markets a bit more carefully these days:

“Global investor Mark Mobius is shifting his focus toward frontier markets, a subset of emerging markets.

Frontier markets aren’t new terrain for him, in fact he has pitched in countries like Vietnam as early as early the 1990s, although his experience wasn’t overly positive. In addition, Mobius believes that resource-rich countries like Nigeria in the frontier markets are in for a long haul.

Funds Mobius manages targeting the frontier markets aren’t vast. These funds account for about 2% of his total global investments valued at around $45 billion. He expects the proportion of frontier market allocation in his overall portfolio to increase over the next decade.

For instance, markets like Vietnam offer value based on current price multiples. Stock markets across Asia surged on strong capital inflows from Western investors during the last year. Most Asian indices have delivered positive returns this year and are close to revisiting peaks witnessed during late 2007 and early 2008. However, this is not the case with the Vietnam index, which lost about 14% this year, and remains about 60% below its all-time highs reached in 2007.

Vietnam’s market is trading at 10 to 11 times its estimated 2010 price-to-earnings, while its regional peers like Thailand, Indonesia, and Philippines are trading at premiums of 14, 17, and 18 times, respectively. Considering that Vietnam traditionally trades in the band of around 8 to 35 times earnings, the present valuations are at the lower end.

Moreover, Vietnam’s economy is slated to be the third-fastest growing economy in Asia, behind regional heavyweights like China and India. The International Monetary Fund projects Vietnam is expected to grow at 6.5% and 6.8% for 2010 and 2011, respectively. Analysts expect Vietnamese companies to deliver an average 22% to 27% earnings growth.

However, investors should be mindful that the Vietnam stock markets do not carry many large-caps (only eight stocks have a market capitalization of $1 billion) and liquidity worries persist. Corporate governance, debt issues regarding state-run enterprises and near double-digit inflation are other things investors should be mindful of.

Experts suggest that reforms in public sector enterprises and the banking system could be positive. Mobius is seeking investment opportunities in the property sector and harbour firms and furniture companies.

Nigeria, another frontier economy, is projected to grow 7.4% during 2010 and 2011, making it the fastest growing economy in Africa. Mobius likes Nigeria for its growth rates and natural resources like oil.

His Nigerian exposure consists principally of three banks, namely Ecbank, UBA and Access Bank.

He also has positions in Kazakhstan including copper company Kazakhmys and the state gas and oil firm KazMunaiGas. He is cautious about the Kazakh banking sector, one of the worst hit by the financial crisis.”

This entry was posted on Tuesday, December 21st, 2010 at 8:44 am and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.