Frontier markets such as Argentina, Kenya, Nigeria, Saudi Arabia and the United Arab Emirates have delivered strong investment returns in 2013, and the asset class is set for continued strong performance in 2014, according to Baring Asset Management (Barings), the international investment firm.
The MSCI Frontier Markets Index has returned +16.4% in US dollar terms to mid-November, reflecting the prospect of long-term structural economic and corporate earnings growth and continued allocations from investors attracted by low correlations to other asset classes. The performance compares very favourably with a 7.1% decline in the MSCI Emerging Markets Index over the same period.
Michael Levy, Investment Manager, Baring Frontier Markets Fund, commented, “We see every reason for investors in frontier markets to be positive as we look out to 2014. Frontier markets are inefficient markets at an early stage of development, providing many mispriced investment opportunities, and we expect the drivers which have supported markets in 2013 – potential for long-term structural growth combined with a low correlation to other asset classes – to remain intact. We are encouraged by the political developments we have seen this year, which show that the countries in our investment universe continue to move towards economic liberalisation and democracy, albeit at a slow pace.”
Two asset classes where Barings sees particular investment potential are new energy opportunities and healthcare companies. The former encompasses exceptionally large oil and gas deposits in Kurdistan, Northern Iraq, which are likely to be brought to market shortly. The latter reflects the rapid growth of generic pharmaceuticals production in many frontier economies as well as the increasing use of private healthcare provision to supplement public healthcare, particularly in the Middle East. Al Noor Hospitals, for instance, is one of the largest private healthcare providers in the United Arab Emirates and a core holding in the Baring Frontier Markets Fund.
In terms of country performance, Middle Eastern markets including the UAE stand out as one of the better performing regions, according to Barings, as the banking sector in the UAE has benefited as a safe haven at a time when continued instability has impacted some other countries in the region. In Africa, a continent where Barings sees the strongest long-term equity market potential, elections in Kenya have resulted in a more market-friendly government coming into power – evidence of the wider, long-term trend towards democratisation across the frontier market universe. Nigeria’s Central Bank also continues to make good progress in managing the currency and inflation, and investments made in security and customer identification augur well for the development of Nigeria’s retail banking market, in Barings’ view.
Michael Levy added: “From an investment perspective, a steady flow of new companies to the market marks steadily increasing liquidity in the frontier markets asset class, and we expect further progress here next year, with potential for privatisations in Romania for example in 2014. We recently invested in a company which has operations based in Laos, and increasingly, other Asian frontier markets, and continue to monitor new investment opportunities very closely.”
Barings launched its Frontier Market Fund in April this year, investing in markets outside developed and emerging market benchmarks. In the six months to the end of October 2013, the Baring Frontier Market Fund has delivered a return of 9.48% versus 8% for its benchmark, the MSCI Frontier Markets Index. The portfolio is well diversified across the major Frontier markets, with significant exposure to Nigeria, the UAE, Saudi Arabia, Qatar, Kuwait and Kenya. The top three sector holdings are Financials, Telecoms and Consumer Staples.