Over the year to the end of June 2016 Aberdeen Frontier Markets’ net asset value per share and share price declined by 13.6% and 16.0% respectively compared to a decline of 12.1% in the MSCI Frontier Markets Net Total Return Index. The Board is proposing to pay an initial dividend in respect of the second half of the financial year of 1.2 cents per share (to be paid in sterling). This is consistent with Aberdeen Frontier Markets’ recently adopted policy of paying a semi-annual dividend with the base level of dividend set with reference to the Investment Manager’s calculation of the yield on the underlying portfolio on a look through basis, less relevant costs.
The chairman’s statement says that broadly, while underlying managers largely outperformed their respective benchmarks, this was outweighed by exposure to underperforming African markets including Egypt, Zambia and Zimbabwe which was only partly offset by positive asset allocation in Asia.
In November 2016, a circular for a proposed tender offer will be published. This tender will provide shareholders with the opportunity to fully realise their investment in the fund at the then prevailing NAV less costs, should they wish to do so. The record date for the tender will be 30 September 2016.
Looking at the managers’ report they say that, in terms of relative performance, manager selection was positive with underlying managers, on aggregate, outperforming their benchmarks. Holdings in Vietnam, Nigeria and Kazakhstan performed notably well in relative terms, as did selected regional funds in Africa including Africa Opportunity Fund and Sustainable Capital Africa Consumer Fund. A small number of holdings underperformed, including an investment in East Africa through PineBridge, Romanian closed end fund Fondul Proprietatea and SCM Africa.
Asset allocation negatively impacted relative returns. Exposure to a number of non-index constituent African markets proved detrimental, notably Egypt, Zambia and Zimbabwe which lagged broader African markets. An underweight allocation to Nigeria was positive but was countered by an underweight in Morocco which was the only market on the continent to record a gain. Asset allocation in Asia was more beneficial with the Company’s significant weightings in Vietnam and Pakistan adding value. Elsewhere, a significant overweight allocation to Romania was positive while exposure to the Middle East was neutral with the positive contribution from a large underweight in Kuwait offset by a negative contribution from an off-index allocation to Saudi Arabia. In Latin America the Company maintained a significant allocation to Argentina but was still underweight to that market’s weighting in the MSCI Frontier Markets Index and this was a negative contributor.
Discount movements detracted from relative performance with several of the portfolio’s larger closed ended investments suffering from discount widening over the year including Fondul Proprietatea, VinaCapital Vietnam Opportunity Fund and Africa Opportunity Fund. The weighted average discount level on the closed end funds in the portfolio was 27.3% at the end of the period, 4.7% wider than a year earlier.
The managers say that the year to the end of June 2016 presented a challenging environment for frontier markets. The first seven months of the financial year were notably weak as investor sentiment continued to focus on the same handful of issues that had dominated thinking prior to the start of the period, namely, US dollar strength, uncertainty over the pace of interest rates hikes in the US, China’s economic and financial health and weak commodity prices. As a consequence, the MSCI Frontier Markets Index was down by 21.0% between the start of the financial year and its lowest point in late January. The subsequent months proved better for investors as markets rallied strongly to recoup much of the prior losses with the previous concerns abating to some extent, at least temporarily. June, however, brought further volatility as a consequence of the significant currency devaluation in Nigeria and the surprise result of the UK referendum.
The performance of individual frontier markets during the period is shown in Figure 3. The usual wide dispersion of returns between markets was in evidence with Zambia recording a loss of 41.2% while Estonia gained 26.3%. Broadly speaking, the regions that fared worst were those seen as being heavily reliant upon commodity or energy exports or having weak government finances. Thus, African, Central Asian and Middle Eastern markets struggled for much of the period while Asia and parts of Eastern Europe generally fared better.
In Africa, the Nigerian market fell by 36.4% with much of the decline a result of a long overdue devaluation of the naira by the Central Bank of Nigeria in mid-June. When the devaluation occurred, the naira weakened by just over 30% against the US dollar, helping to clear a backlog of foreign exchange transactions and prompting a significant uptick in trading volumes on the Nigerian Stock Exchange, with foreigners being material buyers as they strove to reduce large underweight positions (despite the devaluation, Nigeria accounted for 13.4% of the MSCI Frontier Markets Index at the end of June). They view the devaluation as a cathartic event for the Nigerian market in as much as it removes a great deal of short term uncertainty. They anticipate that with this hurdle crossed, investors will increasingly focus on the longer term opportunity presented by low valuations, depressed earnings, compelling demographics and the positive changes being implemented by the Buhari administration.
Elsewhere in Africa, Moroccan stocks gained 5.1% as it remained a bastion of economic and political stability in the region and continued to benefit from a Euro peg and trapped domestic liquidity. The Kenyan market fell by 11.0% but was still amongst the better performing African markets and, despite security and political concerns, continues to cement its position as East Africa’s commercial and industrial hub. Egyptian equities lost 23.8% with investor confidence eroding and a 12% currency depreciation detracting from returns. In Zimbabwe, an economically paralysing liquidity crisis contributed to a 31.9% loss. Zambia’s market also performed poorly, dropping 41.2% with the country’s economic fundamentals remaining in a precarious state and its currency weakening sharply.
In the Middle East, all major markets declined, with lower energy prices impacting on government finances and increasing the focus on structural reforms.
In Eastern Europe, Romania rose by 2.2% supported by foreign inflows attracted to the market by reasonable valuations and solid macroeconomic fundamentals. The Ukrainian market suffered a decline of 31.6% as the consequences of an ongoing recession, weak currency, political instability and fragile peace with Russia contributed to poor sentiment.
Asia was a relative bright spot but still saw markets decline. Pakistan fared best, losing just 2.1% as economic fundamentals improved and reasonable valuations continued to attract foreign inflows. Index provider, MSCI, reflected the Pakistan’s progress by announcing that it would be upgraded to emerging market status from May 2017. In Vietnam, the economy continued to gain momentum and significant steps were taken to improve foreign access to the stock market. Nonetheless, the market lost 7.1%. Sri Lanka was the worst performing Asian frontier market, losing 19.3% as the country suffered from weak investor sentiment amid unclear policy direction and challenging government finances.
In Kazakhstan, the commodity price bust forced the authorities to depreciate the currency by over 40%. This led to the stock market losing 34.0% in US dollar terms despite making a small gain in local currency terms.
In Latin America, Mauricio Macri’s victory in Argentina’s presidential elections in November 2015 marked a turning point for a country viewed as an economic and political pariah on the world stage for much of the past decade. The new government’s reforms proved market friendly; allowing the peso to float, liberalising trade, lowering tariffs and reducing subsidies. The long running stand-off with debt holdouts from a previous sovereign default was swiftly addressed and allowed Argentina to return to international capital markets in April. Over the year the Argentine marked gained 7.3%.
AFMC : Aberdeen Frontier Markets announces first dividend