Frontier markets investing in a so-called ‘Age of Crisis’
Matein Khalid clues you in on catalysts to keep an eye on
My career in international finance has taken me to some of the most amazing places in the frontier and emerging markets. Take Angola. I visited Angola with a Chase Manhattan Bank team to introduce a fixed-income arbitrage fund to the central bank of this (ostensibly) Marxist-Leninist state. Yet Angola earned billions of dollars in oil revenues, which were deposited in escrow accounts in 3 American money centre banks while its Cabinda oilfields were run by Exxon and Chevron, 2 heirs of the Rockefeller Standard Oil empire.
Yet the Cabinda oil enclave was guarded by Fidel Castro’s Cuban battalions at the same time as the US and South Africa backed the Unita rebels waging war against President Eduardo Dos Santos, a former Soviet client and now Africa’s richest multi-billionaire. Geopolitics and banking have coexisted since the time the Medici financed — and then ruled — Florence in the Renaissance and John Company Bahadur created British India. It is no coincidence that loot was the first Hindi word to enter the English language after Robert Plassey’s post-Plassey plunder of the riches of Bengal.
Investors in frontier markets take huge political and currency risks while disclosure, liquidity and even stock exchange insider trading rules are poor to non-existent. Yet frontier markets, on occasion, generate investment fairytale.
After all, in the past 7 years, I have profiled 2 and these bigger stocks in Argentina, Pakistan, Vietnam, Egypt and Sri Lanka. The beauty of frontier markets is that they march to the tune of their own specific macro and micro drummers and are thus not highly crosscorrelated. Disclosure, liquidity and governance, while predictably awful, have improved so that Franklin Templeton has reopened its Frontier Markets fund to new investors. This asset class is not for widows, orphans and those without abdominal fortitude. In 201416, the commodities crash led to a 35 per cent drawdown in the MSCI Frontier Markets index.
I seek very specific catalysts when investing in frontier market. It could be the end of a civil war — Pakistan in 2011 or Iraq in 2017. It could be the election of a pro-markets government after decades of socialist misrule — the election of President Macri in Argentina. It could be an epic currency devaluation — the Egyptian pound or the Nigerian naira in 2016. It could be the emergence of a middle class amid 7 per cent GDP growth — Bangladesh. It could be a wave of privatisations and state government restructuring. Vietnam’s doi moi. It could be a major rally in crude oil and an imminent upgrade to MSCI emerging markets — Saudi Arabia in 2018.
Yet the converse is true too. When crude oil prices plunged and terrorists seized Mosul in 2014, Iraq’s equity markets were shredded. The same thing happened to Pakistan after its Supreme Court disqualified prime minister Nawaz Sherif under pressure from the deep state at Rawalpindi GHQ. Argentina was forced to raise interest rates to 40 per cent and seek a $30 billion IMF credit line after the current peso crisis.
I do everything possible to gain an edge in the frontier investing game. I speak to bankers, diplomats, hedge fund managers, stock exchanges, brokers, regulators, intelligence experts to grasp the politics and financial realities of a country. I track currencies, IMF
The beauty of frontier markets is that they march to the tune of their own specific macro and micro drummers and are thus not highly cross-correlated
loan programmes, debt spreads, fund flows, economic reforms and metrics of political risks.
My current obsessions de jour? Uzbekistan. The death of Sovietera dictator Islam Karimov means an economic new dawn and hopefully a “Tashkent spring”.
Egypt, Iraq and Ukraine are my 3 favourite frontier market Cinderellas. The Vina Housing IPO will be as significant to Saigon (or is it Ho Chi Minh City?) bulls as the British Airways IPO was to Mrs Thatcher’s Britain. Nigeria’s $6 billion infrastructure fund, $76 Brent and dirt cheap naira spells honey.
Wall Street relearnt the lessons of risk in the world’s emerging markets the hard way after Trump lightens sanctions on Russia and Iran. The rouble tanked 8 per cent, its worst weekly fall since the 1998 Yeltsin devaluation.
Rusal’s woes rocked the world metal markets. Local debt markets yields surged when Russian equities fell 8-10 per cent. Time to follow the hoofbeats of the herd and dump Russia? No.
Russia is dirt cheap at 6.4 times forward earnings relative to 12.4 for the MSCI emerging markets index. Brent crude is on a roll. Inflation has fallen to a post USSR low of 2.2 per cent. Bank Rossiya has slashed rates by 900 basis points. Russia is cheap and unloved again. Spasiba Bolshoi Trump!