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“Out of adversity comes opportunity”
Benjamin Franklin’s famous saying has been used on more than one occasion to describe the way in which the Covid-19 pandemic has accelerated change over the past year. Nowhere is this more evident, in our view, than in the emerging and frontier markets financial sector. The resolve of governments to continue driving higher financial inclusion, and the willingness of companies to facilitate a shift to cashless transactions, are stronger than ever. While the pandemic has created multiple challenges for emerging and frontier market banks, we believe that most have managed risk admirably, have continued to innovate, and have weathered the impact of Covid-19 much better than many had expected. The structural opportunity for these businesses remains intact and, in our view, is not currently reflected in valuations, which remain below pre-pandemic levels.
Financial inclusion and fintech as forces for structural change
Financial inclusion – the process of individuals gaining access to basic financial products and services to meet their needs – is a structural change that we believe creates opportunities for select emerging and frontier market banks. In recent years, developments in this area have been accelerated by supportive government policies, fintech innovations and, latterly, by the need to minimise contact in a pandemic environment.
In much of the world, financial inclusion plays a key role in reducing poverty levels and boosting prosperity, which is why governments around the globe have been getting behind the effort. According to the World Bank, since 2010, more than 55 countries have made commitments to financial inclusion, and more than 30 have either launched or are developing a national strategy.
Understandably, fintech is seen by many as a disruptive threat to established banks in developed markets. However, it stands out as an opportunity, rather than a threat, to those incumbent banks in emerging and frontier economies that are driving innovation in their markets. As the shift to mobile banking and cashless transactions accelerates, we believe that our bank holdings offer an attractive proposition as they enjoy the competitive strength that comes from having low-cost traditional deposit franchises, while also benefitting from fintech-driven growth opportunities.
Even though many of the world’s unbanked individuals live in remote areas, where the nearest physical bank branch may be prohibitively far away from homes and places of work, rising mobile phone ownership and internet penetration is changing the way the world gains access to financial products. According to the World Bank’s Global Financial Inclusion Index (“Findex”), 78% of unbanked adults do have access to a mobile phone.
In emerging and frontier markets, gradually increasing penetration of financial products, combined with supportive demographics, should create a backdrop that, for well-placed financial institutions, proves conducive to strong and sustained earnings growth for a long time to come.
Gaining exposure to the opportunity
Through our bottom-up, fundamental approach, we have identified several companies where we believe this change is underappreciated by the market. KCB in Kenya, United Bank in Pakistan, and Bank of Georgia are held in both the Jupiter Emerging and Frontier Income Trust and the Jupiter Global Emerging Markets Fund. While all three are small-capitalisation companies, they are large players in their home markets and are all embracing fintech opportunities to create new avenues for growth.
Read the full article on the trust’s website here.