A recent investment strategy summit hosted by this news service drilled deep into the issues around frontier and emerging markets - finding that some countries that have been out of favour have admirers.

Frontier and emerging markets offer considerable opportunity for returns but they are extremely diverse and investors must typically consider these as long-term investments, a conference organised by WealthBriefing heard recently. 

The conference, held in London, discussed how there is something of a fuzzy boundary between what are considered emerging markets, and frontier markets, the latter being typically understood as younger, less mature economies. 

“Such [frontier] markets have been horribly out of favour...it looks to us as an asset class that has hit bottom,” Dominic Scriven, chief executive of Dragon Capital, an investment firm focused on Vietnam, said.

Speakers on the panel alongside Scriven were Andrew Lister, senior investment manager at Aberdeen Asset Management; Ian Beattie, managing partner and co-chief investment officer, NS Partner; and Nicholas Paris, director, portfolio manager, LIM Advisors. Sponsors for the event were Bulletin; Chelverton Asset Management; Dragon Capital; Eclectica Asset Management; ProFundCom; smartKYC; Standard & Poor’s MMD; Vanguard, and Wealth Management Association. 

Emerging and frontier markets have languished in recent years; the deceleration of China’s economy and cooling of commodity and energy markets, plus the appreciation of the dollar, have hit indices. In 2015, for example, the MSCI EFM Index, tracking emerging and frontier markets, fell 14.9 per cent (in dollar terms). Since the start of 2016, total returns (adding capital growth to reinvested dividends) are 2.4 per cent.

“There are lots of emerging and frontier markets that are really exciting at the moment,” Beattie said, citing a raft of reforms that are being undertaken in a number of countries, citing examples of India and Indonesia. 

“Yes, they [emerging markets] have had a tough few years...the money supply has been growing faster in the West...there has been a stronger dollar and these are not easy headwinds. But it is also pretty clear that these markets are in a bull market and making higher highs,” Beattie added. “These are also structural bull markets and you cannot say that about markets in the West."

Emerging and frontier markets are enormously varied in quality and characteristics, Lister said. His focus is on regions of Latin America, the Middle East and parts of Europe. “That just opens up a huge number of opportunities,” he said. He mentioned countries he likes such as those of the Balkan region: Slovenia, Serbia, Croatia and Romania.

Lister said Vietnam held the largest weighting in his fund, with London-listed Vietnam Opportunities Fund being the largest single holding. “Vietnam is a phenomenal opportunity for the next 10 years. We see similar opportunities in Pakistan and have a large weighting there. Argentina we like and it has surprised everyone,” he said. Argentina was considered “uninvestable” a few years ago; but following political change, the prospects for the market and economy look significantly brighter.

Another country that got a name-check from the panellists was Iran, described by Paris as “hot”. “The market was priced at just 5.7 times earnings. After the partial removal of sanctions in January, it is still priced at only seven times, we can see it going up to 10 before falling off again,” he said. 

Approach
Asked how they decide what emerging or frontier market companies are worth considering, Lister said he tries to avoid assets that are hot: “We try to be contrarian, which goes hand in hand with a focus on value.” About 60 per cent of the portfolio he is responsible for is concentrated in about five markets and the rest of it is spread among smaller markets to obtain a healthy degree of diversification. 

Talking on frontier markets, Dragon Capital’s Scriven said they have a “logical place in a portfolio”, given the pro-growth qualities of such markets in terms of rapid urbanisation and positive demographics. “Generally one finds these companies have higher top-line growth and their profits are improving; you tend to get better valuations over time,” he said.

Beattie pointed out that investors in emerging and frontier market countries need to understand that some companies tend to be state-owned, so it is necessary to look for more entrepreneurial sectors less likely to be part of any state apparatus.

Lister said that one of the big benefits of investing in such nascent markets is a relative lack of research and frequent market inefficiencies, which creates opportunities for managers to identify mispriced companies. Such investing requires experience and focus. “You can certainly gain competitive advantage from being focused on a particular market,” he said.

Beattie gave the example of India’s IT sector as one that has grown strongly and is investible precisely because it is not part of the state or a nationalised sector.

Commenting on the issue of the “middle-income trap” – where countries struggle to break through into full developed status – Beattie said that a key determinant of progress to that goal had to be “some form of pluralism”, referring to the need for high-quality institutions and a degree of openness.

Entry points
Political upheavals and reforms can create some great “entry points”, Lister said, referring to elections late last year in Argentina, with the arrival of a reformist political leader in Mauricio Macri. “Stability is the thing you are really looking for. You don’t want changes of government every two years because they [policymakers] cannot make reforms,” Lister said.

Looking at a broader issue - the development of trading links between the emerging/frontier and developed worlds, such as the Trans-Pacific Partnership - Beattie raised concerns about some flourishing of protectionist rhetoric in recent times, and possible action. He made a passing reference to the ascent of Donald Trump, the Republican front-runner as of the time of the conference. Trump has called for tariffs against China. “Some people seem to have forgotten that trade is a win-win,” he said.