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QD view – Opportunities on the forefront(iers)

Aberdeen Frontier Markets - Incentivised to perform

COVID-19 has monopolised headlines across all industries for the past two years, so you’d be forgiven for missing many other stories, especially those in already niche areas of the global investment market.

But there are plenty of things to get excited about in the under-owned and under-represented frontier markets, which despite representing approximately 30% of the world’s population and 10% of total gross domestic product, account for only 1% of world indices.

In a briefing that I attended last week, BlackRock Frontiers (BRFI)’s Sam Vecht and Emily Fletcher highlighted a few events that have occurred in these markets over the past 24 months which have made the long-term story significantly more positive, but which they believe have fallen under the radar due to the global pandemic.

While investors and consumers alike in Western Europe have felt the pinch caused by materials shortages, distribution issues including a lack of HGV drivers, and at the UK border extra hoops to jump through to navigate Brexit, the managers said Eastern European countries are taking advantage of the opportunities this has thrown up.

Even prior to the COVID-19 outbreak in early 2020, companies around the world had begun – or started thinking about – how to diversify their supply chain. Many have adopted a ‘China Plus One’ strategy and countries like Vietnam and Bangladesh have benefitted, as we have seen with the success of dedicated Vietnamese funds such as Vietnam Holding. COVID-19 focused further attention on this issue as restrictions closed borders, said Fletcher.

She also highlighted a shift in manufacturing from Asia to options such as Turkey and Hungary, as European companies sought to benefit from a shorter supply chain. Extreme freight prices have only encouraged companies to stay with these alternative options.

Making political history

Meanwhile, the BlackRock team noted that political tensions in the Middle East have waned but equally this has gone unnoticed due to the intensity of COVID-19 and because unfortunately, bad news is juicier and is more likely to make the headlines.

Vecht said a series of previous hostilities have ended including that between Qatar and Saudi Arabia which had seen the latter ban the former from utilising their airspace and sea routes and block its only land crossing in 2014. Earlier this year, Qatar and Saudi Arabia finally agreed to a resolution of the crisis brokered by Kuwait and the United States.

Similarly, Turkey and Egypt who severed diplomatic ties in 2013 have seen their economic relationship thrive since deciding to address their differences in May this year. Not only has the overall volume of bilateral trade increased between the two countries, but the structure of exchanges has also shifted towards a more peaceful and positive direction.

Again, COVID-19 has masked significant positive change, but the market has not rerated. Vecht said had these developments happened five to 10 years ago, there would likely be another Middle East-focused investment trust. Gulf Investment Fund has returned 30% in NAV terms over the past 12 months.

Uncorrelated markets

And these aren’t the only events brightening the investment picture for frontier markets. The region also offers long-term structural opportunities from rapid urbanisation, growing middle classes, digitalisation and more.

Ross Teverson, manager of Jupiter Emerging & Frontier Income (JEFI) is excited about the opportunities presented by technological change, which are being embraced in many frontier and emerging markets just as fast as they are in developed markets. He prefers to back the technology enablers – companies providing some of the key components and services that make new technologies possible.

Teverson recently highlighted the potential for another leg up in stock markets in areas such as Mexico, emerging Europe, Africa and Pakistan where strong corporate earnings growth continues, and the pandemic recovery bodes well for both earnings and share price performance.

These overlooked markets also have typically low correlations with developed markets as well as each other. Low trade and economic linkages mean problems in Kazakhstan are unlikely to cause the Vietnamese market to fall, for example.

Interestingly, BRFI and JEFI’s NAVs are less volatile than the S&P 500, FTSE All-Share and MSCI EM indices, despite holding companies in countries many would deem to be high-risk.

Year-to-date, BRFI is up 12.3% in share price terms, while JEFI has delivered 11.25%. Over three years, JEFI is up 30.7% versus a 6.2% increase from BRFI.

You can read more about JEFI in our next research note, due to be published in the coming weeks.

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