While investment returns in the developed markets of Europe, North America and Japan have evolved from ‘low returns for no risk’ to ‘no returns for low risk’, returns in the BRIC economies of Brazil, Russia, India and China are starting to slow, the next investment returns frontier is the countries defined as ‘frontier markets’.
I do not include South Africa in the BRIC/S definition as I do not believe South Africa has the scale, growth rates, dynamism or the political will to develop economically to be grouped with Brazil, Russia, India and China.
There are a number of definitions when it comes to the frontier markets. They include CIVETS (Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa), MIKT (Mexico, Indonesia, South Korea and Turkey) and the ‘Next-11’ (South Korea, Mexico, Indonesia, Turkey, the Philippines, Egypt, Vietnam, Pakistan, Nigeria, Bangladesh and Iran).
I favour the MSCI Frontier Markets Index make-up, which includes Argentina, Jamaica, Trinidad & Tobago, Bosnia Herzegovina, Bulgaria, Croatia, Estonia, Lithuania, Kazakhstan, Romania, Serbia, Slovenia, Ukraine, Botswana, Ghana, Kenya, Mauritius, Nigeria, Tunisia, Zimbabwe, Bahrain, Jordan, Kuwait, Lebanon, Oman, Qatar, UAE, Bangladesh, Pakistan, Sri Lanka and Vietnam.
My arguments are predicated on three factors. Firstly, while the BRIC economies continue to experience positive economic growth, this growth is slowing, while many ‘frontier’ economies’ growth rates continue to accelerate. The growth segments in the IMF chart below are based on the second order measurement of the change in growth rates between two periods.
From a macro-economic perspective, I believe investors seeking to optimise risk adjusted returns should focus on the jurisdictions that offer the best ‘change in growth rate’ measurements. Secondly, from a value investing perspective, many of the ‘frontier’ markets trade at lower earnings multiples than Bovespa, for example, and, more importantly, there are many firms within the frontier markets that offer value investors great deals because they are trading well below their intrinsic values. Thirdly, from a growth investing perspective, the frontier economies, and the firms that operate within them, offer the best forward earning prospects.
I believe African jurisdictions offer the best prospects for value investors as they are coming out years of dictatorship and corrupt practices and I believe, in most cases, the positive changes in government, economic policies and corporate governance have not been factored into their markets and business valuations yet. However, I do think investors need to tread with caution, carry out thorough due diligence exercises before investing and keep an eye on markets, operations and management once they have invested.
Some of my stock picks would include Zenith Bank on the NSE in Nigeria, Safaricom and Housing Finance Company on the KSE in Kenya and MTN and Raubex on the JSE in South Africa. I believe Zenith Bank offers much better value than GT Bank while offering the same sort of growth prospects as GT Bank.
I believe Safaricom and Housing Finance Company are well run businesses that address socio-economic abnormalities that will result in high-growth for many years to come. Kenya, as an example, has set itself the target of becoming a ‘middle class’ economy and Safaricom and Housing Finance Company will both support this drive and benefit from it.
MTN has operations across many frontier markets, including Nigeria, which is it’s most profitable market, and will continue to grow with these economies. Raubex is a construction company active across Africa that will grow on the back of the continents infrastructure boom.