Global investors continue to shy away from frontier markets in their numbers, leaving a number of undervalued, attractive ideas for those who are willing to do the research and weigh up the risks. Portfolio manager Varshan Maharaj explains why we are intrigued by opportunities in frontier markets like Vietnam and the Philippines.
Some observers have commented that markets work in such a way to cause the most pain for the most people. This succinctly alludes to a number of forces, including the interplay of emotions and reason, the influence of fear and greed, and moves in share prices that often seem counterintuitive. These factors lead many financial market participants to buy at high prices and sell at low prices.
We have seen this play out in a number of frontier markets in recent years including Sri Lanka, Pakistan, Kazakhstan and Georgia, where an inflow of bad news and poor sentiment led to low share prices, which subsequently led to good returns for those who were able to buy at low valuations when others were fearful.
While we still see value in these markets, one should constantly ask which markets are currently out of favour, with good businesses trading well below their fair value estimates. Top-of-mind markets currently include the Philippines, which is a consumption-based economy with key drivers including the business process outsourcing (BPO) sector and remittances from overseas Filipino workers. Among other factors, the possible impact of artificial intelligence on BPO revenues and political uncertainty have led to waning investor interest and declining sentiment. This is evidenced by the low and declining value traded on the Philippine Stock Exchange and the low valuations that Philippine companies trade at, both in relation to their history and to our assessment of fair value.
Over the long term, many consumer-facing Philippine companies stand to benefit from the growing demand from their young, large population. Per capita consumption levels for many fast-moving consumer goods (FMCG) are still low when compared to other nations. This suggests a long runway for growth that one is not paying for at current valuations.
Another interesting market is Vietnam, which has achieved impressive economic growth for a prolonged period, driven by its export-focused economy. The United States of America’s third-largest trade deficit is with Vietnam, and fears of trade wars have contributed to elevated foreign investor outflows from Vietnam and the de-rating of many stocks. We are using this sell-off to add to our clients’ existing holdings and also to identify new opportunities. An additional catalyst is the possible upgrade of Vietnam to emerging market status, which would bring more buying interest to this market.
There continues to be little interest in the frontier universe among global investors. This is a contributing factor to the large disparity in valuation multiples between companies in the frontier universe and comparable companies in developed markets, presenting attractive investment opportunities.