Look Out Emerging Markets, Frontier Stocks Are Set to Shine

As the rally in emerging-market stocks eases, equities from more exotic destinations are well-placed to outshine their higher-profile cousins, according to Tundra Fonder AB.

The Tundra Sustainable Frontier Fund, run by the Swedish manager that oversees $400 million in assets, has returned 6.8 percent this year to beat 97 percent of its peers, Bloomberg data show. Egyptian, Vietnamese and Pakistani equities make up almost 60 percent of its holdings, the figures show.

These more exotic markets tend to hold up better than developing-nation stocks during market meltdowns as they’re still dominated by local investors, the firm’s Chief Executive Officer Jon Scheiber said. While frontier markets are also susceptible to President Donald Trump’s policies and accelerating U.S. inflation, Tundra Fonder favors fast-growing nations with big populations that have the potential to play catch-up with more advanced economies, he said.

“Institutions are waking up to this story because it’s difficult to find value in traditional emerging markets and developed markets,’’ Scheiber said. “People are starting to discover that in a big way.”

Emerging-market stocks have outperformed frontier equities over the past couple of years, but the MSCI Frontier Market Index didn’t fall as much as the MSCI Emerging Markets Index as global equities plunged in the two weeks through Feb. 9. The frontier gauge declined 6 percent, while the emerging measure fell 10 percent.

While several Pakistani and Egyptian companies are in MSCI Inc.’s emerging-market index, Tundra Fonder invests in many smaller companies that aren’t included in the gauge, Scheiber said. The CEO and Shamoon Tariq, the firm’s vice-chief investment officer, shared their views in an interview in Karachi on Monday.

What makes you optimistic about frontier markets this year?

• To some extent, they’re insulated from big external shocks, with domestic investors accounting for about 80 percent to 85 percent of ownership in most frontier markets, Tariq said. Pakistani and Egyptian stocks had only small declines during the recent stocks rout, as did Bangladeshi and Sri Lankan equities. However, many of these markets are illiquid as well, so investors have to take a long-term stance
• Top-tier “institutions are continuing to look at countries such as Pakistan because they are looking for yield, looking for something new and exciting since they can find value in traditional emerging markets and developed markets,” Scheiber said

Where do you see the best value among frontiers?

• Countries like Vietnam and Pakistan are coming off a low base in terms of economic development, so there’s the potential for a catch-up effect, like what has happened in places like Russia and Brazil over the past two to three decades, Scheiber said
• Tundra Fonder, which has research offices in Karachi and Ho Chi Minh City, uses its local presence to look beyond the biggest stocks. The top five equities in particular markets can still “be good value but they’re well-researched and well-known”

What’s the outlook for your top frontier picks?

• Vietnam has become “a bit pricey but that is tilted to the blue chips,” Scheiber said. Beyond the half a dozen top-valued companies, it looks a lot more attractive and the long-term story is still intact
• Pakistan is likely to be volatile for the next six months because of the upcoming election and external challenges, but we “like the Pakistan story in the medium to long term.” Due to big declines in nation’s stocks in second half of last year, Pakistani equities now offer a big discount to other frontier markets
• Egypt was being held back policy-wise, but the country has political stability now and is back in an IMF program, Tariq said. The nation is going to adopt more prudent measures like devaluation, making the already cheap market attractive

Source:BLOOMBERG