Global events have had an unusually powerful effect on frontier markets recently, says Michael Levy, manager of Barings’ $50 million frontier markets fund. Frontier economies are commonly considered to be less affected by global developments than emerging markets but as oil prices slumped over the past eight months the frontier markets as an asset class suffered a similarly steep decline.
Levy, though, believes the effect will be temporary. “Certainly, there have been more global issues that have affected frontier markets but they are still lowly correlated to global markets,” he says.
He also believes the positive impact on many frontier countries from lower oil prices and the hammering that asset valuations have endured during the sector-wide pull-back will combine to generate opportunities for investors.
Nigeria is a case in point. Its currency and stock markets remain under intense pressure but Levy says companies there are starting to be “extremely cheaply valued,” even in light of current low oil prices and the political risk surrounding the recently delayed presidential elections.
Barings’ view has shifted sharply since late last year when the fund cut its exposure to the country. “There are without doubt opportunities there, particularly in the financial and consumer sectors,” Levy notes. He particularly likes Nestlé Nigeria: “Looking at a three-to-five-year time horizon, this is a phenomenal company in terms of growth prospects,” he says. Investors might need strong stomachs, though. “Near-term growth may be a bit challenging,” he admits.
Levy is confident that frontier markets will continue to offer a source of portfolio diversification. “It looks like we’ve found a stabilization in oil prices and now we expect frontier markets to start to consolidate,” he adds. “Performance will be driven by fundamentals, so they should have a decent run, certainly in the second half of 2015.”
Countries that offer considerable promise, Levy says, include Bangladesh and Vietnam—a view shared by Gustavo Galindo, senior portfolio manager of the $300 million Russell Frontier Markets Equity Fund. “We have bigger overweights in Bangladesh, where we have a very positive view, and in Vietnam,” Levy explains.
And Sri Lanka, which recently went through a peaceful change of government, is also catching his eye. “The recent elections are a very good example of the growing level of governance in frontier markets. The democratic process went very smoothly, which is very positive for investors,” Levy says.
Bangladesh is seemingly at the opposite end of the scale, having been embroiled in politically-motivated strife since the start of this year. Levy looks beyond the turmoil, though, noting that many local companies are growing strongly.
“Bangladesh has an incredibly successful pharmaceutical sector,” he says. As well as presenting direct investment opportunities, the thriving industry is also supporting the growth of other parts of the Bangladeshi economy. “Through foreign investment in the industry, people are being employed in factories, getting skills, and getting disposable income which feeds through to the consumer and financial sectors,” Levy explains.
Among financial companies in Bangladesh, Levy singles out Brac Bank as being particularly attractive. “Most exciting for us is the fact that it operates the country’s largest mobile payment program, bKash,” he says. In a country where, according to Brac figures, less than 15% of the population is connected to the formal banking system but almost 70% have mobile phones the potential market for mobile payments is huge. Brac is already one of the biggest holdings in the Barings fund and Levy expects to see “phenomenal” growth.
The fund manager is similarly optimistic for the sector and believes potential investors are becoming ever more aware of frontier markets. “Interest levels are amazingly high,” he observes. “Maybe the recent fall stimulated their interest: People who feel they missed the past two years [of strong growth] see the market correction as a chance to get in.”
-Wall Street Journal Blog