When we launched our frontier markets equity strategy five years ago, we noted this universe bore a striking resemblance to the emerging markets of the late 1990s. 
We saw strong structural drivers across these economies, as well as country-specific drivers, with many of these countries moving along the path of peace, improved politics, investment and growth. On the structural side, the peace dividend was by far the most important.
If you go back to the 1990s, almost 50 of these countries were at war or in some sort of conflict. We have only witnessed a handful of battles within frontier nations in recent years, with the spreading base of peace enabling the start of real economic growth and investment. We have been encouraged by the peaceful transitions of power to democratically-elected governments in recent years – in Pakistan and Nigeria, for example.
We have always understood frontier was not a homogenous asset class and many markets at different times would carry higher individual risk. Over the past five years, we have seen considerable variations in political stability, economic performance, foreign investor access, corporate governance practices and exchange rate risk.
Encouragingly, active management has proven to be pivotal when navigating this universe. We continue to believe there is long-term alpha to be captured in these markets, which is not being accessed by broader global or emerging market investors. Below, we highlight some of the most impactful most for alpha generation since the inception of our strategy and the prospects for these outposts over the coming years.
Vietnam
We generated more alpha from Vietnam than any other market. While we have long been overweight the country, this was very much a contrarian position five years ago. Back in 2014, not many external investors were interested in Vietnam, but it all changed about two or three years ago when the government relaxed foreign ownership limits and significant investment flowed into the country.
Fast forward to now, Vietnam’s GDP growth this year is expected to be one of the highest in the world at 6.5 per cent – which appears to be sustainable. Vietnam is fast becoming a hotspot for multinational companies wanting to set up low-cost manufacturing, especially for businesses seeking to divert supply chains away from China.
It is not difficult to see why. Wage costs average below $250 a month, while Vietnam boasts a strong network of free trade deals and a strategic geographical location. As more and more global companies look outside of China, we see Vietnam benefitting from associated job creation, wage growth and increased demand for housing. Our current holdings are well-positioned to benefit, extending across the banking, IT, consumer and real estate sectors.
Nigeria 
Nigeria returned to the investible map last year, after recovering from a two-year recession. This downturn was primarily driven by the central bank’s reluctance to allow the naira currency to reflect its worsening economic conditions. We spent the large part of five years underweight the Nigerian market, which has proven to be beneficial.
Oil price stability has been key to kick-starting Nigeria’s return to growth, experienced alongside improving data coming from the consumer. We played this cyclical recovery through Nigeria’s banks. In 2017, banks were trading at valuations implying most institutions were poised to go bust and this proved to be too pessimistic.
However, while the top-down environment looks better today, fragilities remain. This particularly surrounds the currency, which has yet to converge to one official exchange rate. While hopeful, we are also uncertain if president Muhammadu Buhari’s second term will provide the necessary focus on economic progress. We have been dialling down our position sizes.
Bangladesh
Bangladesh is a country undergoing monumental change. Over the past decade, GDP per capita nearly doubled to over $1,500, foreign direct investment (FDI) trebled and exports compounded in the high teens. In addition, adult literacy rates rose from 47 per cent to 73 per cent and power generation tripled – now reaching 90 per cent of the population.
Economic reforms have the potential to help Bangladesh evolve its export market, as low-cost manufacturing moves from China to countries such as Bangladesh, Cambodia, Myanmar and Vietnam.
In addition, Bangladesh has a burgeoning middle class of nearly 19 million people, which is growing by more than 10 per cent annually. This has profound implications on the growth prospects of most consumer companies. For example, the packaged food market has trebled in size over the past decade to nearly $4bn. On our recent trip to the country, we met with companies likely to be beneficiaries of reforms and population growth dynamics.
Saudi Arabia
Like Argentina, Saudi Arabia was recently upgraded to the MSCI Emerging Market index from its standalone classification. However, given the sheer size and liquidity of its stock market, it will have a more meaningful 3 per cent weighting.
We have been optimistic on Saudi Arabian equities for some time, largely sparked by continued reforms and its ambitious Vision 2030 blueprint.
Positioning-wise, financials have been the highlight, where select stocks have been on a continuous rally since 2017. Banks benefitted from a series of hikes in the local ‘SAIBOR’ interest rate, which effectively mirror the path of the US Federal Reserve, given the Saudi’s dollar peg. Combined with a higher level of government spend, it unlocked a better credit growth trajectory.
Kuwait
Up until very recently, we had been underweight Kuwait through the entirety of our track record. Its banking sector suffered in the aftermath of 2008 and although a relatively stable economy, we viewed its opportunities as less compelling relative to the exciting risk/reward profiles available in frontier Asia, as well as Argentina.
Avoiding a few large-cap names was beneficial in earlier periods, but this worked against us last year, when enactment of progressive capital reform caught the eye of the FTSE Russell index compilers and many stocks re-rated.
We have become more excited about Kuwait’s opportunities this year, especially the banks – an area we have considerably increased our exposure. The crisis hangover is clearing, fundamentals have improved, and we have identified franchises with an edge in Islamic banking and fintech. Meanwhile, infrastructure projects are visibly underway and an extensive government budget paves the way for substantial spending.
An under-owned and undercapitalised asset class
Like much of the emerging world over the past couple of decades, many frontier markets have made huge economic strides, as economies and capital markets liberalised. Despite this, the frontier asset class remains undercapitalised and under-owned. While the potential magnitude of frontier growth is not reflected in the scale of the current stock market capitalisation, we expect this to change over the coming years.
In addition, frontier markets continue to have a low correlation with both emerging and developed markets. We believe this is due to the idiosyncratic nature of the economies, as well as the fact most are not tapped into the global consumption/trade cycle and are more dependent on earlier stage growth. This keeps us excited about the investment possibilities we can access through a portfolio of high-quality frontier stocks.
Oliver Bell is portfolio manager of the T. Rowe Price Frontier Markets Equity fund. The views expressed above are his own and should not be taken as investment advice.