As the rally in emerging-market stocks eases, equities from more exotic destinations are well-placed to outshine their higher-profile cousins, according to Tundra Fonder AB.
The Tundra Sustainable Frontier Fund, run by the Swedish manager that oversees $400 million in assets, has returned 6.8 per cent this year to beat 97 percent of its peers, Bloomberg data show. Egyptian, Vietnamese and Pakistani equities make up almost 60 per cent of its holdings, the figures show.
These more exotic markets tend to hold up better than developing-nation stocks during market meltdowns as they’re still dominated by local investors, the firm’s Chief Executive Officer Jon Scheiber said. While frontier markets are also susceptible to President Donald Trump’s policies and accelerating U.S. inflation, Tundra Fonder favors fast-growing nations with big populations that have the potential to play catch-up with more advanced economies, he said.
“Institutions are waking up to this story because it’s difficult to find value in traditional emerging markets and developed markets,’’ Scheiber said. “People are starting to discover that in a big way.”
Emerging-market stocks have outperformed frontier equities over the past couple of years, but the MSCI Frontier Market Index didn’t fall as much as the MSCI Emerging Markets Index as global equities plunged in the two weeks through Feb. 9. The frontier gauge declined 6 per cent, while the emerging measure fell 10 per cent.
While several Pakistani and Egyptian companies are in MSCI Inc.’s emerging-market index, Tundra Fonder invests in many smaller companies that aren’t included in the gauge, Scheiber said. The CEO and Shamoon Tariq, the firm’s vice-chief investment officer, shared their views in an interview in Karachi on Monday.
To some extent, they’re insulated from big external shocks, with domestic investors accounting for about 80 per cent to 85 per cent of ownership in most frontier markets, Tariq said. Pakistani and Egyptian stocks had only small declines during the recent stocks rout, as did Bangladeshi and Sri Lankan equities. However, many of these markets are illiquid as well, so investors have to take a long-term stance.
Top-tier “institutions are continuing to look at countries such as Pakistan because they are looking for yield, looking for something new and exciting since they can’t find value in traditional emerging markets and developed markets,” Scheiber said.
Countries like Vietnam and Pakistan are coming off a low base in terms of economic development, so there’s the potential for a catch-up effect, like what has happened in places like Russia and Brazil over the past two to three decades, Scheiber said
Tundra Fonder, which has research offices in Karachi and Ho Chi Minh City, uses its local presence to look beyond the biggest stocks. The top five equities in particular markets can still “be good value but they’re well-researched and well-known”.
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