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Five years of peace and prosperity in frontier markets


Oliver Bell, portfolio manager of the T. Rowe Price Frontier Markets Equity Strategy


When we launched our frontier markets equity strategy five years ago, we noted this universe bore a striking resemblance to the emerging markets of the late 1990s. We observed structural drivers across these economies, as well as country-specific driv- ers, with many of these countries moving along the path of peace, improved politics, investment and growth. On the structural side, the peace dividend was by far the most important.


In the 1990s, almost 50 of these countries were at war or in some sort of conflict. Since then, there has only been a handful of battles within frontier nations in recent years, with the spreading base of peace enabling the start of real economic growth and investment. We have been encouraged by the peaceful transitions of power to democratically-elected


governments in


recent years, such as Pakistan and Nigeria. At T. Rowe Price, we have always under- stood frontier was not a homogenous asset class and many markets at different times could carry higher individual risk. Over the past five years, we have seen considerable variations in political


stability, economic


performance, foreign investor access, cor- porate governance practices and exchange rate risk.


Encouragingly, active management has shown to be pivotal when navigating this universe. We continue to believe there is long-term alpha to be captured in these markets, which is not being accessed by broader global or emerging market inves- tors. Below, we highlight the four markets most impactful for alpha generation since the inception of our strategy and the pros- pects for these outposts over the coming years.


VIETNAM We have generated more alpha from Viet- nam than in any other market over the past five years. While we have long been over- weight the country, this was very much a contrarian position five years ago. Back in 2014, not many external investors were interested in Vietnam, but it all changed about two or three years ago when the gov- ernment relaxed foreign ownership limits and significant investment flowed into the country. Fast forward to now, Vietnam’s GDP growth this year is expected to be one of the highest in the world at 6.5% - which appears to be sustainable¹. Vietnam is fast becoming a hotspot for multi-national companies want- ing low-cost manufacturing, especially for


businesses seeking to divert supply chains away from China.


It is not difficult to see why. Wage costs average below US$250 a month, while Viet- nam boasts a strong network of free trade deals and a strategic geographical location². As an ever-increasing number of global companies look outside of China, we see Vietnam benefitting from associated job creation, wage growth and increased demand for housing. Our current holdings are well positioned to benefit, extending across the banking, IT, consumer and real estate sectors.


ARGENTINA


The tide started to turn for Argentina in 2015, when Mauricio Macri’s market-friendly administration took over the country. An ambitious reform agenda was a step in the right direction, but mem- ories of the country’s 2001 default came back to haunt us in 2018 – when a combina- tion of climbing inflation, rates and debt impacted liquidity.


Despite some turmoil, stock selection in Argentina has been a bright spot. When fixed income colleagues warned us of increasing risk around the peso in late 2017, this prompted us to trim domestical- ly-focused companies in favour of more geographically diversified global stocks with US dollar earnings. Our holdings in a fintech-oriented trading platform and a dig- ital services business helped us mitigate some of the stock market’s 50% plunge. Argentina’s path looks much more uncer-


24 | portfolio institutional | October 2019 | issue 87


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