Exploring Investment Opportunities in Frontier Markets

How to invest in frontier markets?

Frontier markets are often referred to as next-generation emerging economies. The term "frontier" applies to nations in the early stages of economic development and financial maturation, with particularly promising investment prospects. Countries such as Vietnam, Kazakhstan and Morocco are classified as frontier markets for their potential for growth and economic development - which remains modest, however, compared to emerging giants such as China or India. Other countries, such as Iceland and certain Gulf states, are classified as frontier markets because of their very small size and/or trade restrictions. Global index provider MSCI defines frontier markets on the basis of three criteria: openness and accessibility to foreign investors, exclusion from the category of developed markets, and the absence of periods of severe economic or political instability, such as hyperinflation or civil strife. Fertile ground for business, but with some risks to consider Over the past decade, many international investors have positioned themselves in frontier markets, seeing them as an undervalued market segment with the potential for fruitful returns. There are several reasons for this interest. According to data from the International Monetary Fund (IMF), these economies are characterized by economic growth forecasts that, on average, exceed those of emerging countries. These countries are largely home to expanding middle classes and young, active populations, which boost consumption and, by extension, economic growth. This demographic dynamic contrasts with the slowdown observed in developed countries and even in some emerging markets, such as China. Industrial relocation is also becoming a disruptive theme in countries such as Vietnam, Morocco and Kenya. These nations are gradually becoming regional hubs for industry, attracting international companies to set up production sites there to benefit from lower costs and higher productivity. On the other hand, frontier markets offer the advantage of performance that is often uncorrelated with global economic cycles, a precious and increasingly rare asset for portfolio managers. This makes them a strategic diversification tool, at a time when emerging markets are tending to follow global stock market trends more closely, with greater correlation. Companies operating in frontier markets promise significant earnings growth at attractive valuation levels. They trade at an average discount of around 45% to developed markets and 20% to emerging markets, with earnings growth estimated at 10.2% for 2023, compared with -3.5% for emerging markets, according to HSBC calculations. Optimum positioning strategy In view of the marked disparities with developed markets and the internal disparities of frontier economies, our analysis suggests that a cautious, strategic approach is required to engage effectively in this asset class. Three key factors need to be taken into account when selecting investment target countries: Financial market depth A deep financial market is characterized by a robust local financial ecosystem and accessible financial markets with adequate liquidity. A country with a predominant stock market culture, supported by a strong local investor base, regular IPOs, index diversity and a mature, reliable regulatory framework, offers relative protection against volatility in the event of economic shocks. This can also mitigate the impact of foreign capital withdrawals and risk aversion. Vietnam and Morocco stand out for their market depth, with varied indices, sector diversity, good liquidity and market openness. Kazakhstan and Iceland, meanwhile, benefit from a well-established financial infrastructure, although liquidity is less abundant. Domestic fundamentals and economic outlook Frontier markets with solid economic fundamentals, such as sustainable economic growth and well-managed debt, offer attractive investment prospects. In conjunction with economic growth, low exposure to foreign currency debt is one indicator not to be overlooked. This characteristic contributes to the stability of the local currency and protects investors against exchange rate fluctuations. It also reflects a country's ability to mobilize sufficient domestic capital to finance its needs and ensure its economic sovereignty. Debt sustainability is therefore a key indicator for attracting investors seeking stability and growth, and reflects a country's resilience to external shocks and changes in risk appetite. Political stability Political stability is a crucial factor to consider when investing in frontier markets. A country with solid institutions, coherent policies and well-established property rights creates an environment conducive to long-term investment, and reduces the uncertainties associated with economic policies and capital flows. Investment vehicles Accessing frontier markets via ETFs ETFs are an efficient way to access frontier markets. They enable you to invest in a diversified basket of equities representing these markets, offering broad exposure to several companies at a reduced cost. This reduces the risk associated with investing in a single company, and eliminates the need to analyze each stock individually. Here are a few physical ETFs that target frontier markets: Selection of high-performance companies Our stock screening tool, the MarketScreener's Stock Screener, has enabled us to carry out research and present you with a selection of high-performing frontier market stocks. These stocks are characterized by robust fundamentals and high growth potential. National Atomic Company Kazatomprom: a major uranium producer Founded in 1997 and majority-owned by the Kazakh state, National Atomic Company Kazatomprom is the world's largest uranium company. It specializes in the exploration, refining and marketing of uranium concentrates (U3O8). The company operates and owns several large uranium reserves in Kazakhstan, and derives its main revenues from long-term contracts with nuclear fuel producers and nuclear power plants worldwide. Kazatomprom also offers complementary products and services related to the nuclear industry, including research, development and consulting activities. As uranium is a nuclear fuel, the company contributes to the production of low-carbon electricity. The prospects for adoption in developing countries and increased demand directly benefit the company. Founded in 1988, FPT Corporation has established itself as a key player in many key sectors of the Vietnamese economy. The group has positioned itself as a major provider of high value-added solutions to businesses in the information technology sector (60% of sales), where it offers solutions in the fields of cloud computing, artificial intelligence, IoT and cybersecurity. In addition, FTP offers telephony and telecoms services (28% of sales) to individuals and professionals. It is also present in the education sector, offering training in the fields of information technology, and is developing residential and commercial projects throughout Vietnam (12% of sales). HPS is a Moroccan multinational that develops and markets electronic payment solutions for financial institutions, processors and switches worldwide. Founded in 1995 in Casablanca by a group of Moroccan consultants and experts. HPS has expanded well beyond its national borders. The company is connected to some one hundred international banks and covers all aspects of the electronic payments value chain. It manages a variety of cards (credit, debit, prepaid, corporate, loyalty, fuel) and payment channels (ATM, POS, Internet, mobile), in partnership with major players such as Visa and MasterCard.

How to invest in frontier markets ?

Frontier markets are often referred to as next-generation emerging economies. The term "frontier" applies to nations in the early stages of economic development and financial maturation, with particularly promising investment prospects. Countries such as Vietnam, Kazakhstan and Morocco are classified as frontier markets for their potential for growth and economic development - which remains modest, however, compared to emerging giants such as China or India. Other countries, such as Iceland and certain Gulf states, are classified as frontier markets because of their very small size and/or trade restrictions. Global index provider MSCI defines frontier markets on the basis of three criteria: openness and accessibility to foreign investors, exclusion from the category of developed markets, and the absence of periods of severe economic or political instability, such as hyperinflation or civil strife. Fertile ground for business, but with some risks to consider Over the past decade, many international investors have positioned themselves in frontier markets, seeing them as an undervalued market segment with the potential for fruitful returns. There are several reasons for this interest. According to data from the International Monetary Fund (IMF), these economies are characterized by economic growth forecasts that, on average, exceed those of emerging countries. These countries are largely home to expanding middle classes and young, active populations, which boost consumption and, by extension, economic growth. This demographic dynamic contrasts with the slowdown observed in developed countries and even in some emerging markets, such as China. Industrial relocation is also becoming a disruptive theme in countries such as Vietnam, Morocco and Kenya. These nations are gradually becoming regional hubs for industry, attracting international companies to set up production sites there to benefit from lower costs and higher productivity. On the other hand, frontier markets offer the advantage of performance that is often uncorrelated with global economic cycles, a precious and increasingly rare asset for portfolio managers. This makes them a strategic diversification tool, at a time when emerging markets are tending to follow global stock market trends more closely, with greater correlation. Companies operating in frontier markets promise significant earnings growth at attractive valuation levels. They trade at an average discount of around 45% to developed markets and 20% to emerging markets, with earnings growth estimated at 10.2% for 2023, compared with -3.5% for emerging markets, according to HSBC calculations. Optimum positioning strategy In view of the marked disparities with developed markets and the internal disparities of frontier economies, our analysis suggests that a cautious, strategic approach is required to engage effectively in this asset class. Three key factors need to be taken into account when selecting investment target countries: Financial market depth A deep financial market is characterized by a robust local financial ecosystem and accessible financial markets with adequate liquidity. A country with a predominant stock market culture, supported by a strong local investor base, regular IPOs, index diversity and a mature, reliable regulatory framework, offers relative protection against volatility in the event of economic shocks. This can also mitigate the impact of foreign capital withdrawals and risk aversion. Vietnam and Morocco stand out for their market depth, with varied indices, sector diversity, good liquidity and market openness. Kazakhstan and Iceland, meanwhile, benefit from a well-established financial infrastructure, although liquidity is less abundant. Domestic fundamentals and economic outlook Frontier markets with solid economic fundamentals, such as sustainable economic growth and well-managed debt, offer attractive investment prospects. In conjunction with economic growth, low exposure to foreign currency debt is one indicator not to be overlooked. This characteristic contributes to the stability of the local currency and protects investors against exchange rate fluctuations. It also reflects a country's ability to mobilize sufficient domestic capital to finance its needs and ensure its economic sovereignty. Debt sustainability is therefore a key indicator for attracting investors seeking stability and growth, and reflects a country's resilience to external shocks and changes in risk appetite. Political stability Political stability is a crucial factor to consider when investing in frontier markets. A country with solid institutions, coherent policies and well-established property rights creates an environment conducive to long-term investment, and reduces the uncertainties associated with economic policies and capital flows. ETFs are an efficient way to access frontier markets. They enable you to invest in a diversified basket of equities representing these markets, offering broad exposure to several companies at a reduced cost. This reduces the risk associated with investing in a single company, and eliminates the need to analyze each stock individually. Here are a few physical ETFs that target frontier markets: Selection of high-performance companies Our stock screening tool, the MarketScreener's Stock Screener, has enabled us to carry out research and present you with a selection of high-performing frontier market stocks. These stocks are characterized by robust fundamentals and high growth potential. National Atomic Company Kazatomprom: a major uranium producer Founded in 1997 and majority-owned by the Kazakh state, National Atomic Company Kazatomprom is the world's largest uranium company. It specializes in the exploration, refining and marketing of uranium concentrates (U3O8). The company operates and owns several large uranium reserves in Kazakhstan, and derives its main revenues from long-term contracts with nuclear fuel producers and nuclear power plants worldwide. Kazatomprom also offers complementary products and services related to the nuclear industry, including research, development and consulting activities. As uranium is a nuclear fuel, the company contributes to the production of low-carbon electricity. The prospects for adoption in developing countries and increased demand directly benefit the company. Founded in 1988, FPT Corporation has established itself as a key player in many key sectors of the Vietnamese economy. The group has positioned itself as a major provider of high value-added solutions to businesses in the information technology sector (60% of sales), where it offers solutions in the fields of cloud computing, artificial intelligence, IoT and cybersecurity. In addition, FTP offers telephony and telecoms services (28% of sales) to individuals and professionals. It is also present in the education sector, offering training in the fields of information technology, and is developing residential and commercial projects throughout Vietnam (12% of sales). HPS is a Moroccan multinational that develops and markets electronic payment solutions for financial institutions, processors and switches worldwide. Founded in 1995 in Casablanca by a group of Moroccan consultants and experts. HPS has expanded well beyond its national borders. The company is connected to some one hundred international banks and covers all aspects of the electronic payments value chain. It manages a variety of cards (credit, debit, prepaid, corporate, loyalty, fuel) and payment channels (ATM, POS, Internet, mobile), in partnership with major players such as Visa and MasterCard.