'Frontier markets' like Pakistan lure US investors

Published Jul 22, 2013 07:00am
Pakistani stock brokers monitor a market at the Karachi Stock Exchange in Karachi, Pakistan. -Photo by AP
Pakistani stock brokers monitor a market at the Karachi Stock Exchange in Karachi, Pakistan. -Photo by AP

NEW YORK: Bulgaria, the United Arab Emirates and Pakistan are among the countries with the best-performing stock markets in the world this year. And the success of these so-called frontier markets, mainly in Asia and Africa, has attracted US investors eager to find the next set of rapidly growing countries now that Brazil and other emerging markets have fallen into a slump.

“These places might scare some people,” says Russ Koesterich, global chief investment strategist at the money-management giant BlackRock. “But they're seeing some of the fastest growth in the world.”

People had a similar response when investors were dabbling in emerging markets during the 1990s, Koesterich says. “Brazil and India — those used to be scary places, too.”

Unlike the US and Europe or even China and Brazil, frontier-market countries have little connection to each other. But they have a few things in common. They're small, growing quickly and some, like Kuwait and Qatar, are rich. Many shunned the outside world for years and are slowly opening their doors to outside investments.

Thanks to rapid economic growth, the MSCI Frontier Market index has gained 22 percent over the past 12 months. That compares with a 3 percent rise for MSCI's emerging market index and 25 percent for the Standard & Poor's 500, the benchmark US stock index.

Investing in frontier markets carries plenty of dangers. Argentina's government could decide to take over more private companies and leave investors with nothing. The war in Syria could spill into Lebanon and Jordan, upending their thriving markets. Cote d'Ivoire, Pakistan and many of the 37 frontier countries have had coups, wars and other turmoil over the past two decades.

“Buying into them has to be a long-term play,” says Jack Ablin, chief investment officer at BMO Private Bank. “You have to take some leaps of faith.”

The steady rise of their stock markets has apparently helped investors put aside their worries. They've dropped money into frontier market funds week after week, raising the total to $3 billion so far this year, according to EPFR Global, a company which tracks the flow of investment funds. That's triple the amount deposited in them last year and just shy of the full-year record of $3.07 billion in 2010.

Cash has streamed in so quickly that Franklin Templeton's $1.3 billion frontier fund has decided to start turning away new investors. Its top holdings include a Romanian oil and gas producer, OMV Petrom, and a batch of companies from Qatar and other countries on the Persian Gulf.

Last month, Wells Fargo's private banking group, which manages $170 billion in clients' money, took its first step into the frontier, pulling a portion of its money out of emerging markets like Brazil, China and India and putting it into countries like Pakistan and Vietnam.

A key reason for the move was that the frontier markets are largely insulated from problems plaguing bigger countries, said Sean Lynch, the global investment strategist for Wells Fargo Private Bank.

When stock and bond markets in the US and Europe were rattled by talk that the Federal Reserve would withdraw some of its support for the US economy, many countries' currencies sank against the dollar. But Lynch noticed that frontier countries' currencies held up.

Why? As a group, these less developed countries aren't as tied to the world's developed economies. Their industries are growing by selling to customers at home or nearby. Kenya's East African Breweries Ltd., for example, has most of its customers in neighboring African countries.

The main attraction for investors is the rapid economic growth. In theory, it should pull many people in those countries out of poverty, and as they begin to spend their higher pay on refrigerators and mobile phones, local businesses should flourish.

“A lot of them have growing populations and expanding workforces, and they don't just rely on exports of food or oil,” Lynch says. “Look at Vietnam. They traditionally exported coffee, seafood and rice. Now they're making high-end machinery.”

Not so long ago, these same traits lured investors to emerging markets. But after more than a decade of strong economic growth, the upstarts have slowed. Brazil, Russia and India are now closely tied to swings in global markets, as well as to each other.

When China's economy slows, for instance, it drags down financial markets in Brazil, which counts China as the top customer for its exported goods.

But if a frontier market like Ghana ran into trouble, Vietnam and Kuwait wouldn't even notice.

Still, a frontier market like Pakistan can leave some investors skittish. Osama bin Laden was found and killed in a US raid in Pakistan in 2011. The country is often at odds with neighboring India. And Pakistan has been the target of US drone strikes against suspected militants near the border with Afghanistan.

Wells Fargo's Lynch and many others in the investment world argue that the good news out of Pakistan is going unnoticed. An election last month brought Nawaz Sharif to leadership as prime minister. Sharif is considered pro-business and has pledged to take on unemployment, inflation and corruption. In early July, his government lined up a $5 billion loan from the International Monetary Fund.

All of that has helped drive up Pakistan's stock market 11 percent this month. For the year, it's up 28 percent. By contrast, China's Shanghai Stock Exchange composite index has lost 10 percent this year, and Brazil's Bovespa has dropped 22 percent.

Still, a surging economy can often prove to be a dud of an investment, says Christian Deseglise, managing director at HSBC Global Asset Management.

Take China. Over the past five years, its economy has expanded by more than 10 percent on average. And over those same five years, China's stock market has lost 2 percent.

“Some of these countries will have economies that do well but markets that do poorly, and vice versa,” Deseglise says.

That's the main reason investors say they avoid staking too much on a single frontier country. It's too easy to imagine something going wrong. So, investors often buy a little of all of them, spreading their bets over Africa, Europe and Asia.

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Comments (7) (Closed)


bangash
Jul 22, 2013 08:04am

The stock market rise in Pakistan is not based on positive economic fundamentals but money laundering and gambling. Pouring money into Pakistani stocks is a bad long term idea.

Johar
Jul 22, 2013 01:22pm

This news made my day.

Khan
Jul 22, 2013 02:01pm

A rising stock market is no reflection of true economic picture of the country. For instance, Dow Jones is at all time historic highs but its economy is not in the same position. Unless Pakistan sees manufacturing growth, export growth, rise of education and decline in unemployment, stock market is just a bubble which will explode one day and hurt a lot of people financially just as it did 6 years ago. So be careful people, before you plunge all your savings into KSE.

Waqar Khan
Jul 22, 2013 07:04pm

@bangash: Bangash, you talk without any reference and source..but what I see in Pakistan, is a positive political change, people are encouraged now, and within a few years...we shall see a new and developed Pakistan...Pakistan is like the UAE or Asia, it's has the natural resources, and only require a political stability, with free media, it has allowed every citizen to know about the government policies and corruptions....so eventually, if Pakistan fixed its electric problem, which will, and the political problem...everything else will be solved.

Ali
Jul 22, 2013 07:33pm

Spoke to the KSE ex-chairman a few years back. He, himslef admitted that the KSE is not for the small investor as it is mainly a play o a bunch of few large investors who constantly manipulate it...

akram
Jul 23, 2013 04:02pm

Pakistan like any other country needs to be judged on its own merits, too many people understand poorly the motives of US investors, and dismiss the growth potential of this country. I have no doubt we will see this potential finally come to fruition within the next 10 - 20 years. The government can accelerate the process by cracking down on tax evasion, and pursuing those who steal gas and electricity, especially business owners and wealthy areas. Reform of the Federal Board of Revenue is imperative to stop all those under the table cash deposits to tax officials. Computerization and modern remote management of tax affairs is the long term answer. These steps are unpopular in the short term but are needed for the nation to move forward with growth, it should start with proper examination of parliamentarians assets. one must after all lead from the front.

IBN-E-ASHFAQUE
Jul 23, 2013 04:45pm

@Khan: I completely agree with Khan.