Nigerian economy leads frontier market opportunities
Companies such as Guaranty Trust Bank, Zenith Bank and Nigerian Breweries have put Nigeria at the forefront of frontier market opportunities, according to Baring Asset Management.
Africa’s largest economy, Nigeria, recently rebased its GDP upwards to USD500 billion for 2013, ranking the country as the 26th largest economy in the world1, and the forthcoming general elections in 2015 could provide further opportunities for investors in a country undergoing significant reforms.
Nigeria represents 13.2 per cent of the Baring Frontier Markets Fund, the largest single country holding, followed by Saudi Arabia (9.7 per cent), Kuwait (9.6 per cent) and the United Arab Emirates (9.2 per cent). While the MENA region represents 42.2 per cent of the Fund, African holdings now account for 21.6 per cent, ahead of Asia (13.8 per cent) and Eastern Europe (8.6 per cent).
In April, the Baring Frontier Markets Fund celebrated its first anniversary with one-year performance of 24.8 per cent.
Michael Levy, manager, Baring Frontier Markets Fund, says: “The core reasons to consider frontier markets in an investment portfolio remain the same today as when we launched the fund: these markets represent significant potential for long-term growth in a low-growth global economy; they are inefficient markets at an early stage of development, providing many mispriced investment opportunities; and they offer low correlations with developed and emerging equity markets.
“Return on equity and dividend yield forecasts for frontier markets in 2015 are significantly ahead of developed and emerging markets, reflective of higher relative economic growth rates and early stage opportunities. GDP growth is also forecast to be at a premium to peers in the near term and for decades to come.”
A good example of a frontier market opportunity is Zenith Bank. While the second-largest bank in Nigeria has benefitted from a cautious approach to risk, we forecast loan growth to sustainably and profitably top 15 per cent per year going forward, and its highly liquid balance sheet has a capitalisation ratio among the highest in the world. Other frontier market stocks we like include Kenya’s Safaricom and the largest auto dealer in Laos, Kolao Holdings, which is benefitting from rising car ownership in Laos as well as neighbouring Cambodia and Myanmar.
Africa is forecast to become more important to frontier market investors, believes Barings, following the recent announcement that, as of 2 June 2014, Qatar and the United Arab Emirates will be reclassified from the MSCI Frontier Markets Index to the MSCI Emerging Markets Index. Qatar and the United Arab Emirates currently have a 36.3 per cent weighting and their reclassification will proportionately increase the exposure to the long-term growth potential of markets in Africa, Asia and Latin America, as well as other markets in the Middle East such as Kuwait and Oman.
Levy says: “We have said before that Africa is a region where we see strong long-term investment potential, and one consequence of this change in the index is that we expect to see increased attention directed to markets in the continent. It’s one of the characteristics of the frontier markets universe that it continues to evolve as economies develop, and one of the key reasons it remains such an exciting asset class for investors.”