Vietnam, Argentina, Romania, Pakistan and Saudi Arabia are the next group of developing economies that investors should be paying attention to now, according to GAM Investments’ Tim Love.
Love, manager of the five FE Crown-rated GAM Star Emerging Equity fund, said there is a new group of countries with the same growth potential as the famed BRICs group of countries – Brazil, Russia, India and China.
The so-called VARPS are GAM Investments’ favoured frontier markets, which have yielded some of the best trading opportunities in recent years.
However, as the BRIC countries have gone through economic hardship or policy changes, said Love, investors started to turn their attention to frontier market plays.
And countries such as the VARPS can offer interesting opportunities for growth but that are in earlier stages of the development cycle, said the manager.
“Ultimately, we believe it is worthwhile incorporating frontier market exposures within an emerging market portfolio primarily because they provide access to upcoming growth markets that will likely be included into the MSCI Emerging Markets equities index at some point, in our view,” he said.
“Also, we believe that these frontier markets offer an aspect of diversification to a wider emerging markets portfolio as they are non-correlated in nature due to their lower levels of liquidity in comparison to the more developed emerging markets, like China or India.”
Yet, Love warned that the political and economic climate of these countries can be volatile.
Below, Love considers each market in more detail.
Vietnam
First up is Vietnam, which Love said has witnessed strong, stable economic growth over the past decade. This has been translated into strong market returns as the below chart shows, with the MSCI Vietnam index up by 61.92 per cent over the past three years.
Performance of indices over 3yrs
Source: FE Analytics
“Domestic reforms have also helped to boost the country’s agricultural exports, such as fishery and coffee, while construction projects are in abundance owing to the country’s growing status as a popular tourist destination,” said Love.
“A growing middle class has also boosted sectors such as dairy as consumers turn their attention to health products and a more nutritious diet.
“In addition, we believe Vietnam’s inclusion to the MSCI Emerging Markets index later this year should keep valuations high.”
Argentina
Love’s second favoured country is Argentina, where much work has been done by president Mauricio Macro to rebuild the nation’s reputation as an investment destination.
However, Love conceded that the country continues to display political risk and that there remain issues on the Argentinian peso.
“We believe there are a number of domestic issues and a wide scale programme of monetary and fiscal tightening is likely to keep Argentina’s economy in a state of recession this year,” said the GAM Star Emerging Equity fund manager.
“It will be interesting to see what unfolds on the reform front and it could be wise wait for some of these headwinds to abate.”
The challenging conditions have been reflected in market performance, as the above chart shows, with the MSCI Argentina index is down by 13.37 per cent over the past three years.
As such, Love said a better way to access Argentine stocks with via American depositary receipts - stocks that trade in the US but represent a set number of shares in a foreign market.
“Still, we believe that once the country manages to iron out its issues of recession and currency volatility, its banking and electricity sectors could emerge to be very attractive,” he added.
Performance of indices over 3yrs
Source: FE Analytics
Romania
Next up is Romania, which Love said was a “typical convergence play” into the EU and has benefited from several tailwinds in recent years.
As well as its own currency, the manager said, Romania has also benefited from EU reconstruction funds and drive towards greater environmental, social & governance (ESG) levels.
However, investors have faced challenges more recently after the Romanian government introduced a tax on its banking sector, signalling a more socialist stance and sparked concerns among ratings agencies, its own central bank and other eurozone members.
“As a result, we are more cautious regarding Romanian investments and have moved a wait-and-see mode,” said Love. “We would need to see a change in the government policy stance before moving back to a more optimistic stance.”
The MSCI Romania index has risen by 77.84 per cent over three years.
Pakistan
Pakistan, like Vietnam, has recently benefited from the announcement that its listed equities will be included in the broad MSCI Emerging Markets index, said GAM Investments’ Love.
Its economy has positive demographic trends and is a beneficiary of numerous infrastructure projects falling under the $46bn ‘China-Pakistan Economic Corridor’.
However, it too has a number of risks worth paying attention to, said the manager, who highlighted rising tensions in the Kashmir region with regional rival India and the country’s large current account deficit.
“Nevertheless, valuations here are currently extremely attractive and in particular, we like exposure to cement companies because they are simple and politically uncomplicated – they tap into the country’s booming construction,” the manager added.
The MSCI Pakistan index is down by 31.03 per cent over the past three years.
Saudi Arabia
Completing Love’s list of the next BRICs is Saudi Arabia, which has benefited more recently from measures making it easy for international investors to access the market and its burgeoning privatisation programme.
“Should the right opportunities arise, we feel Saudi Arabia is worth considering from an investment perspective over the course of 2019,” said the emerging markets specialist.
The MSCI Saudi Arabia has risen by 9.16 per cent over the past three years.
Since Love took over GAM Star Emerging Equity in November 2017 it has made a loss of 11.92 per cent compared with a 4.23 per cent loss for the benchmark MSCI Emerging Markets index and a 3.77 per cent loss for the average IA Global Emerging Markets peer.
Performance of fund vs sector & benchmark under manager
Source: FE Analytics
Over three years the fund has made a total return of 52.31 per cent, while the benchmark is up 51.8 per cent. The $26.1m fund has an ongoing charges figure (OCF) of 1.65 per cent.