Beyond emerging: Looking to the frontiers


Global economic growth may be accelerating, but stock market prices largely reflect this good news This may mean hunting elsewhere for investments that still have the capacity for stronger growth. Emerging markets may be one option, but their faster growing cousins, the frontier markets, can bring something different to a portfolio.

Frontier markets are ‘pre-emerging’ countries, those too small or too illiquid to be considered an emerging market. They include countries such as Kenya or Bangladesh, which are at an early stage in their economic development, but growing fast. These markets share some of the same qualities as emerging markets, but also stand as a unique asset class in their own right.

Like emerging markets, they are natural beneficiaries of the falling dollar, for example. Emerging and frontier markets had lagged while the Dollar remain high. In a climate where the Federal Reserve was raising interest rates, investors reasoned, emerging markets were likely to suffer. It raised the cost of their debt and left many unable to ease their own monetary policy to soothe any economic strain.

The dollar is now under pressure as President Trump’s leadership has increasingly been called into question. A number of forward-looking economic indicators also pointed to a weakening in economic growth, suggesting the US recovery is mature and may be about to roll over. The resulting lower Dollar should help emerging and frontier market economies thrive.

Also in common with emerging markets, frontier markets are beneficiaries of a reappraisal of political risk. From Brexit to the rise of populism in the Eurozone, to the election of Donald Trump, there is a growing recognition that political risk is as much a developed market phenomenon as an developing markets phenomenon. The key difference is that investors are paid to take the risk in emerging and frontier markets, but are often not adequately compensated in expensive developed markets.

If the pace of growth is high in emerging markets, it is the same or even faster in some frontier markets. For example, in developing Asia, the average pace of GDP growth is predicted to be 6.4% in 2017 and 2018, but Bangladesh, Cambodia and Vietnam are all outpacing the average (1.) In Sub-Saharan Africa, South Africa is a laggard, while Botswana, Ethiopia, Tanzania and Uganda are all registering impressive growth.

Equally, frontier markets also have some unique characteristics that distinguish them from emerging markets. They tend to be owned predominantly by domestic investors. This makes them less vulnerable to the sentiment of international investors. This means that stock markets tend to be influenced by domestic factors, rather than global risk sentiment, or the actions of the Federal Reserve. Frontier markets may not move in line with other global stock markets and can provide some balance and diversification to a portfolio.

This was particularly notable during the sell-off in emerging markets after the election of Donald Trump and fears of greater protectionism. Emerging markets were worried, while frontier markets merely shrugged. Frontier markets are notably less exposed to trade with the US. There are exceptions, such as Vietnam, but there are still good companies to buy in these markets that are subject to different drivers.

In this respect, it is important not to use the benchmark as a starting point. This would see higher weightings to Argentina and Kuwait, and a number of the oil markets, none of which feature significantly in the Aberdeen Frontier Markets Investment Company Limited. We believe the political difficulties in both countries outweigh the investment potential. It would also necessitate a significant weighting in financials, which make up over 40% of the MSCI Frontiers index (2.)

To our mind, frontier markets reward discernment. They are illiquid and can be prone to sudden changes in sentiment. When this happens, investor often try to head for the door at the same time, prompting sharp falls in the stock market and the currency. It can be advantageous to look at them with a contrarian approach, avoiding ‘hot’ markets, where growth is fully reflected in the price of shares. This is easier in a closed-ended fund because the structure enables the manager to buy when others are selling. Even so, we monitor the liquidity of our underlying investments closely.

Valuations still look attractive across frontier markets. With some exceptions, such as Argentina and Kuwait, frontier markets are trading at lower price-to-earnings ratios to emerging and developed markets. The companies generate better returns on the money they invest and have stronger profitability. Debt is less freely available, so companies tend to have lower leverage and stronger balance sheets.

Perhaps surprisingly, frontier markets also exhibit less volatility than emerging markets. Partly this is the lack of liquidity, but it is also a reflection of the lack of attention they receive from international investors. They are not subject to the ebb and flow of international money in the same way as emerging markets.

The Trust has recently been through a restructuring. We have moved from a fund of fund structure to a directly invested portfolio. The process of transition has taken some time, but is now largely complete. The new management team sits within the emerging market equity team, led by Devon Kaloo, and is managed according to the Aberdeen-wide investment process, focusing on quality companies, trading at attractive valuations.

Our portfolio is low turnover and we don’t try to allocate to individual markets according to their growth outlook. We find that there is only the loosest relationship between GDP growth and stock market performance, and have therefore found it more fruitful to look for well-managed companies with sound balance sheets and solid, long-term prospects, and hold them for the long term.

This leads to some natural biases in the portfolio. We tend to be more exposed to areas such as consumer staples, for example, and some of the banking stocks. Banks are often the first beneficiaries of economic growth in frontier markets as people open bank accounts and buy insurance for the first time. In contrast we tend to have less exposure to more cyclical sectors such as resources. These areas can be buffeted by the fortunes of the global economy and commodities prices.

At the moment, our portfolio has balanced exposure to over 50 companies in 24 markets. We also have a significant weighting to frontier Asian markets, such as Vietnam, Pakistan and Bangladesh. This plays into a theme seen across emerging markets, but also in frontier markets – the emerging consumer. These countries have a growing middle class and strong demographics, prompting rapid growth in their consumer economies. It is a trend we are also seeing across Africa. Certainly, it is coming from a low base, but promises strong long-term growth. With this in mind, our second highest weighting is in Kenya, through companies such as mobile operator Safaricom.

We believe there is still plenty of room in investor portfolios for emerging markets, and for frontiers in particular. Our fund continues to trade at a discount to net asset value, which we do not believe reflects the strong growth potential and compelling valuations for companies within the portfolio. At a time when developed markets are stretching ever-higher, we believe investors need to look more broadly for exciting growth.

  1. Source: IMF – file:///C:/Users/reyna/Downloads/text.pdf – p. 202 – April 2017


Aberdeen Frontier Markets Investment Company Limited

Important information

Risk factors you should consider prior to investing:

  • The value of investments and the income from them can fall and investors may get back less than the amount invested.
  • Past performance is not a guide to future results.
  • Frontier market countries typically have smaller economies and even less developed capital markets or legal and political systems than traditional, more developed emerging market countries. As a result, the investment in frontier markets can be riskier than investing in emerging market countries.
  • Investing globally can bring additional returns and diversify risk. However,currency exchange rate fluctuations may have a positive or negative impact on the value of your investment.
  • The Company can use derivatives in order to meet its investment objectives or to protect from price and currency movements. This may result in gains or losses that are greater than the original amount invested.
  • This Fund may invest through non-regulated markets which are subject to increased risk relating to ownership and custody of investments.
  • Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
  • The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
  • The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
  • The Company may charge expenses to capital which may erode the capital value of the investment.
  • Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
  • There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
  • As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
  • Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.


Other important information:

The Company is a Closed-ended investment scheme registered pursuant to the Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended and the Registered Collective Investment Scheme Rules 2008 issued by the Guernsey Financial Services Commission.

The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis, should not be taken as an indication or guarantee of any future performance analysis forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI” Parties) expressly disclaims all warranties (including without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages (

Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1YG. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.


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