Tap into the prospects of frontier markets
The strong position of South-east Asian economies has attracted the attention of fund managers in Britain.
Saturday 29 January 2011
Most investors looking to tap into booming emerging markets look to China and India, and it is easy to see why: Anthony Bolton's Fidelity China Special Situations fund recently unveiled a near 13 per cent return in the five months since it launched. It now plans to raise £162.1m in a new share offer.
However, some analysts warn that these markets could be set for a correction. "There are pockets of over-valuation in emerging markets, particularly those stocks which are exposed to the burgeoning domestic consumption story in China and India," says Craig Heron, director of multi-manager funds at Henderson.
Other emerging markets which are yet to cross mainstream investors' radars could hold greater prospects. Relatively smaller emerging south-east Asian countries, such as Malaysia, Thailand, Indonesia and the Philippines, not only benefit from but are an integral part of the economic boom in the Asia-Pacific region.
Meanwhile, the Middle East and Africa (MENA) and Latin America are also increasingly attracting fund managers' attention. Adrian Lowcock, a senior adviser at Bestinvest, says: "Often referred to as frontier markets or 'emerging emerging' regions, these economies are becoming interesting stories in their own right.
"They may not be as big as the BRIC [Brazil, Russia, India and China] nations but they have the economic growth and rising wealth associated with developing economies. They stand to benefit greatly from the continued demand for resources in which they are rich."
In the last six months of 2010, the MSCI Frontier Markets index outperformed emerging markets, gaining 16.5 per cent compared with 12.3 per cent.
From 2002 to 2010 the Frontier Markets index returned 9.2 per cent a year, outperforming global equities by more than 3 per cent, according to figures from Merrill Lynch.
There is growing demand for the new frontiers: Jupiter launched its Global Emerging Markets fund in November and BlackRock raised £94.8m last month when it launched its Frontiers Investment Trust.
Aberdeen Asset Management is poised to launch the UK-domiciled Aberdeen Latin American Equity Fund, a sister to the $505m Luxembourg-domiciled Aberdeen Global Latin American Equity fund. The new fund will open for general investment on 9 February. Lowcock expects more frontier funds to be launched in 2011.
We ask the experts for their pick of the frontier markets, what to buy, and weigh up the risks:
The 10 members of the Association of Southeast Asian Nations (ASEAN) has a combined population of more than a half a billion people – twice as many as the US. However, they generate only one-tenth of the economic output of the States, reflecting a huge untapped potential for growth, says Raiffeisen Capital Management.
Many of the ASEAN markets have significant natural resources and produce highly-sought agricultural products such as wood, rubber, sugar cane, palm oil and rice.
Not only are they well-positioned geographically to supply the billion people-strong markets of China and India but in many cases they have competitive advantages over their larger neighbours, according to Mark Monson, senior fund manager of emerging markets at Raiffeisen in Vienna.
"As the level of integration between Asia's economies increases, these markets are more and more independent of the fluctuations in economic cycles in the more developed economic regions," he says. "An investment in ASEAN markets is an ideal form of diversification for a global equities portfolio."
Monson believes Thailand and the Philippines are the most promising markets in the region.
The Philippine stock market has risen 39.8 per cent in the past year for Sterling investors, while the Bangkok stock exchange has increased by 61.2 per cent, figures from Aberdeen Asset Management show.
In the Philippines, political risk is less acute than it once was. President Corazon Aquino is expected to push through more reforms designed to reduce corruption and improve public finances.
Coupled with a boom in domestic consumption, they should continue to support share prices. In Thailand, corporate earnings are rising quickly and are poised to grow at 10 t o20 per cent for the next few years. "Thailand may be about to experience a burst of strong economic growth similar to the beginning of the 1990s," says Monson. "A really negative scenario for Thailand is only conceivable within the framework of an economic collapse in Asia, and there are no signs of that happening."
Raiffeisen tips consumer-related stocks, selected banks and property companies. For a less risky play, Ben Yearsley, an investment manager at Hargreaves Lansdown, recommends buying into a traditional emerging markets fund which has some exposure to smaller Asian markets. "The amount invested in frontier markets will often be small but generally the manager will invest only if the company is exceptional," he says.
He likes Aberdeen Emerging Markets, which is up 25.3 per cent in the past year and 126.9 per cent over five years, according to Trustnet, the data provider. Its largest three weightings are Brazil (17.2 per cent), Hong Kong and China (15.5 per cent) and India (13 per cent) but it also has 5.7 per cent in Thailand, three per cent in Malaysia, 2.3 per cent in Indonesia and two per cent in the Philippines.
Middle East and Africa
The economies of the MENA region are expected to grow by more than five per cent this year, though individual economies, such as Qatar and Egypt, are poised to expand far faster. Qatar is primed for double-digit growth and is set to expand by 50 per cent by the end of 2012, according to the International Monetary Fund.
Henderson's multi-manager team uses the Franklin Templeton MENA Fund, which is managed by Algebra Capital in the region. About 40 per cent of the portfolio is invested in Saudi Arabia, while Qatar, Egypt and Kuwait each account for 15 per cent.
Sam Vecht, portfolio manager of the BlackRock Frontiers Investment Trust, particularly likes Qatar, which will host the 2022 World Cup.
"Qatar has great potential for growth in sectors such as financials and industrials and there are several large cap stocks yielding more than seven per cent," he says. "Following the successful World Cup bid, Qatar's infrastructure will undergo significant transformation in the next few years, providing a new wave of opportunity."
The outlook for economic growth in parts of Africa is also bright, with Nigeria, Kenya and Zimbabwe anticipating increases of four to eight per cent.
Henderson has invested in the Imara African Opportunities fund, managed by Zimbabwe-based pan-African financial services company Imara. Nigeria, Zimbabwe and Kenya each account for about 20 per cent of the fund, with a further 10 per cent in Zambia. Top holdings include breweries in Nigeria and Kenya, British American Tobacco's operations in Kenya and Zimbabwean food producers.
Lowcock tips the First State Global Emerging Markets Leaders Fund, which has more than 26 per cent in the Middle East and Africa. Its second largest holding is AngloGold Ashanti, a global gold producer, based in Johannesburg, South Africa, according to Trustnet. The fund has made 24.7 per cent in the past year, 53.6 per cent over three years and 114.9 per cent over five.
Many Latin American countries have come through the credit crisis relatively unscathed, thanks to strengthened financial systems and prudent banking practices.
Countries such as Brazil, Chile and Mexico are characterised by young, urban populations with rising incomes and a growing middle class. By 2020, the Future 7 (Argentina, Mexico, Indonesia, Vietnam, Turkey, Egypt and South Africa) population will account for a tenth of global consumers and disposable income per capita will rise by 52 per cent.
Devan Kaloo, head of global emerging markets at Aberdeen Asset Management, says expanding, young populations bode well for retailers, banks and consumer-related companies.
Kathryn Langridge, manager of the new Jupiter Global Emerging Markets Fund, has also been investing.
She has bought into clothing manufacturer and retailer Hering in Brazil and also likes plays on infrastructure, logistics and transportation.
The risks of frontier markets
Frontier markets are not for the faint-hearted. Investing in individual countries or regions increases risk and – if you get it wrong – could prove an expensive mistake.
Patrick Connolly, head of communications at AWD Chase de Vere, the financial adviser, says: "While the long-term story remains good, in the short-term Latin America is faced with headwinds of rising interest rates, high inflation, strengthening currencies, potentially unsustainable public spending and equity prices which are already above average." Brazil, for example, has just increased interest rates to 11.25 per cent to help combat inflation, which is expected to remain above five per cent throughout 2011.
Frontier market investors are also thwarted by a lack of liquidity and endemic problems such as political instability and social unrest.
For example, in Mexico the drugs war is "beyond crisis proportions", says Darius McDermott, managing director of discount broker Chelsea Financial Services.
He adds: "Frontier markets are a real 11 out of 10 investment. For investors, the major issue is a lack of liquidity. This can be brutal to shareholders as any rush to the door will send prices tumbling."
Ben Yearsley at Hargreaves Lansdown recommends putting a small percentage of your portfolio into frontier markets.
"The potential is obviously bigger the sooner you get into these small markets but the risk is greater, you could risk losing your shirt."
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Amy Winehouse statue unveiled in Camden
- 2 Lego breaks out of the toy box and heads for the gallery
- 3 George Galloway on Scottish independence: The political class is doing what Hitler couldn’t – destroying Britain
- 4 Headaches, fry ups, and hair of the dog - why do we get hangovers, and is there such thing as a 'cure'?
- 5 A bottle of wine a day is not bad for you and abstaining is worse than drinking, scientist claims
George Galloway on Scottish independence: The political class is doing what Hitler couldn’t – destroying Britain
Daniele Watts: Django Unchained actress detained in Los Angeles after being mistaken for a prostitute
Scottish independence: Nationalist leader Jim Sillars threatens pro-union companies with 'day of reckoning' after independence
Scottish independence: Yes campaign feels the heat as Alex Salmond's NHS claims come under furious attack
Scottish independence: Britain faces 'constitutional crisis' at next election
£23m Birmingham cycle scheme is attacked by Tory councillor for not catering to the elderly
iJobs Money & Business
£280 - £320 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...
£35000 - £38000 per annum + Benefits: Ashdown Group: Training Coordinator / Pl...
Data Governance Manager (Solvency II) – Contract – Up to £450 daily rate, 6 month (may go Permanent)
£400 - £450 Per Day: Clearwater People Solutions Ltd: We are currently looking...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony