Ashmore video
Video

Frontier markets, why and why now

By Andrew Brudenell

Andy Brudenell, Ashmore’s Lead Portfolio Manager for Frontier Market strategies answers questions about why Frontier Markets, and why now for your asset allocation.

The questions put to Andy include:

  • Considering FM have significantly outperformed EM and DM, what has driven performance? Can we expect this period of relative outperformance to continue?
  • What is the impact of Russia’s invasion of Ukraine?  If certain regions have benefitted from higher commodity prices, is this sustainable?
  • What impact will a hawkish Fed and high inflationary pressures have on Frontier Markets?
  • Can you comment on the increased capital market activity and expansion since 2020?
  • Vietnam is a market that has been receiving increased attention.  What is driving growth in the country?  Are there any broad themes playing out in the country (such as a manufacturing shift from China to Vietnam, or if digital/consumer class/other themes are also contributing)?

Watch video

Transcript is available below.

Transcript

Stephen Rudman: Welcome, and thank you for watching Ashmore's ‘Frontier Markets: Why and Why Now?’. My name is Steven Rudman, and I'm a member of the Ashmore New York Client Team. Today I will be asking Andy Brudenell, Ashmore's Lead Portfolio Manager for our Frontier Market strategies, questions about why frontier markets, and why frontier now, for your asset allocation.

Andy, thank you so much for joining today. We're very happy to have you, with a very timely topic. I will jump right in with the first question we have on the list, and I think a good one. Since the start of 2021, frontier markets (FM) has significantly outperformed emerging markets (EM) and developed markets (DM). What has driven FM performance is question one, and maybe more importantly, can we expect this period of relative outperformance to continue?

Andy Brudenell: I think people have noticed that whenever we get a global crisis that very briefly correlates almost all assets, when the rebound begins to happen, it tends to be driven initially by the developed markets, and then followed by the emerging markets, and then frontier does tend to lag a little bit. I think when there's been a shock, it takes a bit of time for people to look at some of the smaller asset classes.

One of the reasons is really that in 2020, frontier markets were quite slow to recover, even when it became clear that they were relatively resilient in terms of COVID and macroeconomics. It took some time for investors to gain confidence and believe that, and we began to see that come through in 2021, and again, as you mentioned, in 2022 as well.

That resilience I mentioned came in terms of macroeconomics resilience, COVID (and how the virus moved around) and also the average age of frontier market populations. It also came from just how disciplined governments were in pushing through what they needed to do to avert a further crisis. We've also had accelerating earnings growth, and on a valuation basis, frontier markets began to look very attractive indeed. So, you've seen that catch-up in 2021, and it's continuing in 2022. In 2022 there has also been the added bonus of, relatively speaking and in absolute terms, political stability in this asset class versus certain emerging markets I could mention. That's why we believe, for all of those reasons, that we could see this outperformance continuing this year.

Stephen Rudman: Andy, thank you very much. That's a perfect segue into the major story of the first quarter and continuing, which is obviously the Russian invasion of Ukraine, with those being emerging markets. What do you think that does for frontier markets, either from a positive standpoint or negative standpoint, particularly where commodity prices may have some impact in certain frontier markets?

Andy Brudenell: Yes, so obviously frontier markets are seeing the same kind of impact in terms of higher energy prices and higher food prices. Again, as with most other asset classes, the impact it has depends on the country. Obviously, for those countries that are net importers of agricultural products and food, and net importers of energy, it’s going to be tough times. But when we look across the spectrum of our investable universe in frontier markets, and compare it particularly to emerging markets, we think frontier markets come out favourably. There are a number of large energy exporters that have small food bills because they have relatively small populations in comparison to the energy that they export – I'm thinking particularly of the Gulf Cooperation Council (GCC) nations, but also places like Colombia as well. And then there are those countries that might be slightly negatively impacted, and might be self-sufficient in food but may not have a lot of natural energy resource and therefore have to import that. So those countries are impacted on a net basis, but they might have other strengths, like a much stronger trade balance elsewhere, outside of those commodity products. One example of that in particular is Vietnam. So overall, we would say on balance, frontier market countries are relatively insulated, versus emerging market countries.

Stephen Rudman: That also leads to the next question. It appears we now have a hawkish US Federal Reserve (Fed), and people may argue this has come too late, which is probably a conversation for another time. But with a ton of high inflationary pressures, what do think would be the impact on frontier markets if interest rates get dramatically higher from current levels? How would that affect frontier market growth?

Andy Brudenell: Inflation is being felt across the world and frontier markets are no exception. In terms of the relative change in levels of inflation, I would argue that frontier markets are seeing less of a step change. If you think about developed markets, and the US for example, coming from incredibly low inflation to a scarily high figure that hits the media in Europe, UK and the US at the moment. In frontier markets, this inflation step change isn't quite as bad. I would also argue that central banks in frontier markets are not quite as behind the curve.

I would also argue that because these economies are used to higher inflation and higher interest rates, there's going to be less of an impact on economic activity. It's not positive, obviously. But on a relative basis, frontier markets should be less impacted – and more capable of coping with it – at the country level as well as at the corporate level.

And, in some countries such as in the Middle East, where the currency is pegged to the US dollar, this will be quite a good opportunity for the banking sector, particularly as Middle East nations will also have strong balance sheets from energy prices. Banks will find a much better margin coming their way. So, again, overall, the effects are certainly mixed, but on a relative basis, we feel quite comfortable with that.

Stephen Rudman: Excellent, and reassuring. It makes me feel a bit better. Next question, so you know, in frontier markets there has been capital market activity and expansion since 2020. Is this the start of a new trend? If we move away from the last 24 months of market volatility, if we look further out, over the next five or 10 years, are we getting a new phase of expansion for frontier markets, generally?

Andy Brudenell: I think the data suggests there's been a lot more participation in the equity markets within the frontier world over the last 24 months. Arguably, people around the world had a bit more time to spend looking at capital markets. So, I wouldn't necessarily rely on that.

But generally, there's been more participation by local investors in each market, and there's been a real push by regulators and capital market participants to really deepen and broaden their equity markets. So, we're seeing companies place larger portions, government sell down portions of their stakes, increasing liquidity in already existing listed stocks, but also seeing a number of initial public offerings (IPOs) across a whole range of countries, be it in the Middle East, in Asia and in Africa. So, I think there is a structural improvement and sustainable improvement in depth and breadth of capital markets overall across the frontier universe.

Stephen Rudman: Excellent. I'll ask a question we get all the time, which corresponds with the answer you just gave.  Vietnam has been the darling of frontier markets, and has received a lot of attention, particularly based on how major manufacturing is shifting away from China and other Asian markets into Vietnam. Can you talk us through how Vietnam has done so well, is it just about that manufacturing shift, or is it because of the digital world the country is embracing as its economy grows? Does it have that long-term potential of great growth rates and potential good returns?

Andy Brudenell: I think Vietnam is a good proxy example for frontier markets, because it touches on a number of things, as you suggest. The story that China has gotten expensive for manufacturing, and therefore Vietnam can become the next manufacturing hub has been ongoing for some time, and well before COVID. And has continued at pace. Foreign direct investment (FDI) into Vietnam continues to be very, very high, particularly from Singapore companies, Thailand, Korea, and Japan, in particular. We’ve also seen FDI from companies in the US, and also Europe too.

I would also add that since COVID and global supply chain disruptions, businesses have started to think about alternatives to China. They’re started to recognise the importance of having more than one supplier and one manufacturing hub. So, Vietnam also benefits from that diversification opportunity as well.

Also, Vietnam’s GDP growth has been very strong, through this FDI, through better management of the economy, the trade balance that I mentioned before, and credible stability in the currency. All of this has led to mid to high single-digit GDP growth. This in turn is creating wealth, encouraging investment and producing a snowballing effect. The middle classes are growing, and it’s a very young population. These are very early adopters of technology and the internet, as well as mobile phones, e-payments and e-commerce. Even simple things such as modern retail formats, higher quality supermarkets, grocery stores and pharmacies are all nice to visit. These are all new areas for an economy that’s dynamic, young, growing and suddenly getting wealthier, so it ticks lots of boxes.

Usually, frontier market countries will have one or two or three of those, whereas Vietnam at the moment has all of them. Vietnam also has a capital market regulator that's really encouraging equity market participation, and a broadening and deepening of those of those markets, along with improving disclosure and transparency from the regulatory side of things. So, yes, for a number of years now, Vietnam has been in quite a sweet spot, and COVID has really only accelerated that opportunity and long-term investment potential.

Stephen Rudman: That's excellent, thank you. That ends the questions that have been sent in. But I'll give you one last shot to sum up. At Ashmore, particularly when discussing emerging and frontier markets, we often talk a lot about fundamentals, valuation and technicals. In the last minute or two, could you outline the reasons for frontier markets, period, and the reason for frontier markets now. The floor is yours.

Andy Brudenell: Absolutely. As I mentioned, frontier market economies were slightly slower to experience the rebound out of COVID, so we’re seeing an ongoing cyclical recovery. Also, with inflation not rearing its head in frontier markets as much as elsewhere, interest rates don't need to go as high, valuations are cheaper, structural returns on equity are higher, and dividends are coming back as everyone realises corporate balance sheets are in better shape than had been feared. The growth and return opportunity looks very attractive to us. And, as we've seen over the last sort of 15-20 years, frontier markets is also structurally a lower volatility investment product as well.

So, to sum up, frontier markets have a good growth outlook, cheaper valuations, a higher dividend yield, and lower volatility. Frontier markets are in a cyclical sweet spot, and given there is a lot of uncertainty around the world right now – macroeconomic, commodity-related and political – we really think frontier markets sit in quite a nice place and we would encourage people to look more closely at this asset class.

Stephen Rudman: Excellent. Thank you. That was brilliant. Thank you for the time, very, very helpful. I'd like to say to the people watching, please take a look at frontier markets. One of the things people have successfully done is they have added frontier markets to their existing developed and emerging market positions because of a relatively low level of correlation. It does dampen volatility as an addition to those existing positions, and we'd love to discuss that with you. If you do have questions, we are available, willing and capable of taking you through the story.

Subscribe to our insights

Subscribe and get notified as soon as we publish our content