Frontier Markets likely to follow the same path as Emerging Markets
Lower valuations with high dividend yields can make it a compelling investment opportunity
Sam Vecht, Investment Manager of the BlackRock Frontiers Investment Trust, believes that the outlook for Frontier Markets is strong and outlines the investment case for this asset class.
"Frontier Markets represents some of the world's fastest growing economies, offering growth at inexpensive valuations without the burden of high leverage or excessive hot money. These markets also stand out for their low levels of indebtedness, high dividend yields, better demographic profiles than both Emerging and Developed markets and improving corporate governance.
"Whilst Emerging Markets are not suffering the same levels of debt burden as the Developed Markets, Frontier Markets have seen even lower levels of debt. Moreover, where an ageing population will limit long-term rates of return in the Western world, and even parts of the Emerging world, Frontier countries' demographic profiles provide strong backdrops for future economic growth."
Vecht continues: "Looking back at the trends which transformed mainstream Emerging Markets over two decades ago, from a niche asset class to a mainstream investment, we believe that the opportunity exists for Frontier Markets to follow the same development path. Previously isolated economies liberalised, grew at a phenomenal rate, lifted millions out of poverty and created a new generation of consumers."
"We currently hold positions in Frontier countries which stand to benefit from positive structural reforms, high growth and have well-capitalised liquid banking systems, so they are well placed in the current global environment.
"Valuations in Frontier Markets are attractive, they are currently trading on a Price to Earnings Ratio of around 10x, compared to Emerging Markets on 12.5x and Developed Markets on 15x. Frontier Markets also offer high dividend yields, currently just above 4%, well above Emerging and Developed Markets on 2.8%1.
This year we are particularly bullish about Vietnam and Bangladesh having previously been sceptical about Frontier Markets in Asia. Vietnam has a trade surplus for the first time since 1992, a strong private sector benefiting from low cost skilled labour, a large pool of private savings and no immediate triggers for a banking crisis. The stock market in Bangladesh continues to open up, improving reporting standards and transparency, allowing us to take advantage of well managed companies in the country."
Vecht concludes: "We believe the long term outlook for Frontier Markets is a compelling one and 2013 will be the breakout year for Frontier Markets."
Since the fund was launched by BlackRock in December 2010, the Trust's net asset value has increased by 1.2%, outperforming the MSCI Frontier index by 8.2%. In the last year the Trust's net asset value has increased 22.5% compared to the return of the MSCI Frontier index of 12.3%.*
Compared with Emerging and Developed Markets, analysis for Frontier Markets is under represented. Therefore, it is important to note that potential investors should be mindful of the economic, political, corporate governance and market risks associated with this asset class.
1 Source: MSCI, Bloomberg, January 2013
* Source: BlackRock Indices. Blackrock Frontier Investment Trust and benchmark as at 22nd January 2013. Performance figures are provisional and calculated on a mid-market basis with net income reinvested on ex-dividend date in GBP terms, unless stated otherwise.
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