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.
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.