Reform- whether you blame the fall in commodity prices, the rise in easily accessible communications such as social media or the generational shift following the revolutions of the 1970’s, what is clear is that a number of very large countries are on a very clear path of social, political and economic reform. These reforms create excess economic growth as the economies liberalise and attract capital for investment. Whilst there will always be countries moving in the opposite direction the Frontier world today is characterized by a number of very high profile and successful reform stories.
Valuation- Frontier became an asset class in 2007 when the first Frontier Emerging Market indices were formed. On 2015 price/earnings ratios, Frontier Markets today are trading at the biggest discount to Emerging and Developed markets since the asset class was formed. They are cheap on an absolute basis as well, with a price/earnings multiple of below 10 times for this year.
Rising US Interest rates and global Interest rates – are they bad for frontier markets? As the US starts to raise interest rates at some point later this year, and as global bond yields rise, the question is should frontier markets suffer as liquidity drains out of them and chases higher returns elsewhere? In fact, over the past 15 years, higher bond yields have consistently been associated with outperformance from frontier markets. Please see chart in the attached document.
With one of the main reasons for investing in Frontier Markets being the excess economic growth created by the reform processes, our investment process is centred around finding companies that can take advantage of this economic growth. Our work is heavily focussed on finding and meeting company management that we feel comfortable in trusting our own and clients’ money with in a corporate governance structure that allows us as minority shareholders to benefit from the success of the company. Our industry focus is therefore heavily tilted towards domestic companies that benefit substantially from the reform process and rising incomes amongst the local population.
We believe that a global portfolio of companies with strong management operating in reforming countries will produce excess returns to fund holders over a long period of time. And given current global reform trends and current Frontier country stock market valuations, we believe the opportunity is currently ripe.
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