Bagon, Myanmar

Investing in frontier markets can sometimes be a lonely, even depressing experience for a fund manager. For every “go-go” country – such as Mongolia, where the local stock market has stormed ahead – there’s usually a longer, sorrier list of markets from which investors have beaten a rapid retreat.

Take the frontier markets tracked by the MSCI index. There are very few star performers: only Jamaica, Trinidad and Qatar. But there are plenty of horror stories: nearly all of eastern Europe, Sri Lanka and Bangladesh – all were down by more than 24 per cent in the past 12 months.

In fact, frontier markets – in aggregate – have had a miserable few years, and now mostly trade on, or near, historically low valuations.

Yet for Slim Feriani of specialist fund manager Advance Emerging Capital, this just means opportunity. “Frontier markets are the cheapest equity markets globally, trading on single-digit forward earnings multiples, 1.5 times price-to-book value ratios, and an average dividend yield exceeding 5 per cent,” he says. “Frontier markets remind us of emerging markets 10 to 20 years ago, but starting from a much stronger base. And we all know how well emerging markets performed over the past 10 to 20 years.”
Emerging prospects

Myanmar and Bangladesh represent very different high-risk markets, but they share some common themes.

First, the big investment opportunity is in servicing the local consumer base, not in investing in multinationals. There’s a sizeable middle class that wants basic consumer necessities.

Second, as less mature markets, they are easier to invest in, says Douglas Clayton of Leopard Capital. Most investors looking to invest in “new Asia” focus on the larger stock markets of the Philippines, Vietnam or Indonesia. I reckon I’ve seen more than two dozen London-listed Vietnam funds. But Clayton thinks investors should steer clear of these markets. I agree. I get the impression there are too many wealthy local families simply looking to unload assets in exchange for hard, western cash.

Counter-intuitively, smaller frontier markets can be better for corporate governance, as local investors are usually incredibly keen to bring in outside money and improve local standards.

It’s an optimistic view – and one that fails to resonate with investors who can pick up cheap, European mega-caps at near-bargain prices. As one institutional investor told me: “Why bother with frontier markets when you’ve got such quality stuff on your doorstep?”

So I don’t envy the task faced by one of the most adventurous investors on the planet: Douglas Clayton, managing partner at Asian fund management firm Leopard Capital.

A couple of years back, I mentioned him in a column about the “next” market to watch out for: Cambodia. Although the local stock market only opened for business last year, Clayton’s firm has been quietly building up a pipeline of private equity deals in everything from tourism to food manufacturers. It’s too early to pronounce any of this a success, but it is undoubtedly true that Cambodia is emerging on investors’ radar.

Legendary emerging markets investor Mark Mobius highlighted the country as one to watch after a recent visit.

Back at Leopard Capital, Clayton is about to launch a range of funds that could put new frontier markets on the map. In particular, he reckons Bangladesh and near-neighbour Myanmar (Burma, as we used to know it) are likely to boast not only the fastest-growing economies, but also the most interesting stock markets in the next few decades. They represent very different opportunities, according to Clayton.

Bangladesh is fairly developed, boasts many successful local entrepreneurs, already has established, export-oriented local manufacturing industries and has somehow managed to survive the ravages of political infighting, environmental hazards and population pressure. Western worries about corruption don’t appear to faze Clayton, either.

Myanmar, by contrast, was – until 12 months ago – the subject of countless international sanctions, and a challenger to North Korea, Cuba and Zimbabwe as the least investor-friendly place on earth. Now, everything is changing fast, as the new civilian government starts to welcome foreign capital.

If Leopard can get its fund up and running, it’ll probably be one of the first to invest in the country. “Investors can take their pick across sectors such as natural resources, telecoms, electricity, banking, tourism, real estate and manufacturing,” says Clayton. “However, most of the best opportunities are new ventures that will require lots of operational support, as the local human resource pool is inexperienced.”

If funds investing in Bangladesh and Myanmar can succeed, Clayton reckons he might be able to persuade westerners to take a look at a “real” frontier: Nepal and the “happy kingdom” of Bhutan. “Bhutan offers similar opportunities as Nepal in hydropower, tourism and agriculture, but in a much more stable political environment,” he says. Watch this space.

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