After witnessing a period of volatility in recent years, frontier markets have seen a strong performance during the past three months, with an increase of over 10%.1 While performance has lagged emerging market equities, we believe the recovery has the potential to be lasting. If risk appetite continues to return, we think frontier markets could present an attractive opportunity for investors.
In our view, stock selection and a focus on companies that can deliver quality earnings built on frontier markets’ long-term structural growth potential present the most attractive opportunities. Thus, we are not merely investing in growth markets, but in the growth companies that our research indicates can deliver sustainable multi-year investment returns.
Unique long-term potential
The long-term growth potential accessible in frontier markets companies is rarely available in mainstream asset classes. Market penetration is still very low for many business activities. Factors such as favourable demographic trends, which see rising incomes and affluence combine with relatively young and growing populations, continue to fuel expansion in areas as diverse as dairy production to banking.
We target companies at the forefront of this transformation. Vietnam Dairy Products is one such company. It is the leading dairy producer in Vietnam, a market with fast growing dairy consumption. It has the strongest brand recognition within the market as well as a dominant distribution network that acts as a high barrier to entry to competitors. In our view, the company’s dominant franchise, strong financials and credible management will make it a long-term winner in this expanding market.
We also see frontier market companies innovating to provide unique delivery systems relevant to their markets. Safaricom, the Kenyan mobile telephone business, has been a pioneer in the mobile payments market. Brac Bank, the Bangladeshi bank, has built its subsidiary bKash into the country’s leading mobile payment platform in just a few years.
Whether rising dairy consumption or the mobile money revolution, we see plenty of structural growth areas such as these that should provide fertile ground for investment into the longer term.
Improving market access
More broadly, we are encouraged by improving market access for the asset class. We see Saudi Arabia moving to improve international access to its equity market, Romania accelerating its privatisation programme and Myanmar has just opened a new stock exchange. In time, the legal and financial framework for investing in Iran should be in place as well.
Such trends enlarge this investment opportunity set, in which individual companies and markets have unique growth drivers – a characteristic that grants the asset class a relatively low correlation to other equity markets.
As we look forward, we see every reason for investors in frontier markets to be positive. We expect the drivers that have supported a recovery in recent months to remain intact and believe a focus on the long-term potential of frontier market companies will lead to superior returns over time.
1. Source: 20/1-2016 to 14/4/2016, Datastream
Michael Levy is on the Baring EMEA and Frontier Equity Team at Baring Asset Management, London