At first glance, frontier markets have delivered remarkably similar returns to the more established emerging markets over the past decade, but that simplistic view masks vast underlying differences between the two asset classes.
While a quick snapshot today shows comparable long-term numbers, the reality is that frontier performance is lowly correlated to emerging market equities, as well as far less volatile. The same is true between frontier and developed market performance.
In fact, to the surprise of many people, the MSCI Frontier index has been less volatile than even the MSCI Europe and Japan indices over the past decade. The low correlation and volatility are primarily due to decreased foreign investor activity within frontier markets.
With global growth expected to remain elusive in 2024, the world’s developing lower-income countries are expected to lead the way in growth terms over the coming year and beyond. This should not be surprising, considering that 16 out of the world’s 20 fastest-expanding economies over the past decade have been countries classified as frontier.
But despite continually improving fundamentals and the diversification qualities of the frontier universe, investors continue to underappreciate the eclectic and appealingly priced opportunities available in these often-misunderstood economies. In addition, the high degree of market inefficiencies arguably makes this equity investment class exceptionally suitable for active investing.
As such, we believe it is vital to regularly go on the road and visit the diverse countries within frontier to get a better understanding of the broader opportunities and risks within these untapped economies, as well as deepen our awareness of the unique corporates within.
If there was one part of the frontier universe far beyond the current gaze of investors, it would be the former Soviet republics in Eastern Europe and Central Asia. However, we continue to be encouraged by the investment opportunities within this vast part of the planet, which is why our team took a visit to the region last year.
Visible optimism abounds in Kazakhstan
While Kazakhstan is the world’s ninth-largest country by size, it has a small population of just 20 million people. Impressively, Kazakhstan's GDP per capita has risen tenfold to nearly $12,000 over the past two decades, primarily as a result of the development of the country’s commodity markets. However, the country also boasts a well-educated population – with a literacy rate of almost 100% – and relatively good infrastructure.
A turning point for the country came in 2019, when corruption-plagued leader Nursultan Nazarbayev – the first president of Kazakhstan – stepped down and was replaced by Kassym-Jomart Tokayev. While corruption remains a major issue, Tokayev has made strong strides in removing loyalists of the prior regime from top government and corporate posts.
On our trip, we visited Kazakhstan’s futuristic capital Astana, as well as the country’s commercial centre of Almaty, which sits at the foot of the majestic Trans-Ili Alatau mountains. While improvements remain in their infancy, it was encouraging to see how eager the government and corporates were in terms of elevating standards. On the ground, virtually everyone was excited about the prospects of this new era.
The top holding within our frontier markets portfolio is Kazakh financial group Kaspi, which is also the largest company in the MSCI Frontier Markets index. Kaspi’s super-app is the largest consumer-focused ecosystem in the country – with services in payments, marketplace and fintech. In fact, this is one of the most advanced digital eco-systems in the world where consumers easily can pay for items in-store, order groceries, renew their driver’s license or view their digital passports.
In January this year, Kaspi joined the Nasdaq after a $1bn share sale, which valued the entire company at more than $17bn, which has since then rise to nearly $22bn.
We met with the chief executive officer of Kaspi on our visit and continue to be impressed by his vision and the company’s growth plan execution, as well as capital allocation track record. We believe the valuation remains cheap and consensus estimates still underestimate Kaspi’s potential, particularly as it looks to grow beyond its current borders.
In addition to Kaspi, we have positions in several other Kazakh companies – including Kazatomprom, one of the world’s largest producers of natural uranium, Halyk Bank, the largest savings bank in the country, and London-listed Central Asia Metals, a mining company with operations in Kazakhstan and North Macedonia.
While we remain optimistic about the outlook for our Kazakh investments, it is important to remain vigilant to the risks, particularly as the country shares long borders with both Russia and China, who are competing for resource wealth and political influence. However, so far Kazakhstan has played its geopolitical cards in a well-balanced manner.
Unlocking value in off-benchmark Georgia
Our frontier team also visited the Georgian capital Tbilisi on our trip to the region. This small dynamic economy, which only boasts a population of about four million, has performed well over the longer term, driven by its oligopolistic banking sector.
The war in Ukraine has resulted in a huge influx of highly skilled Russian and Ukrainian IT developers into Georgia, which has propped up the economy and the currency. Surprising to many, the economy has risen by 25% in US dollar terms since the outbreak of the Ukraine war.
While not in the MSCI index, we characterise Georgia as a ‘regular frontier’, as its reasonably robust economic drivers are offset by political and geopolitical risks.
Our meetings with the country’s central bank and Ministry of Finance reinforced our view of the conservatively managed Georgian economy. It maintains a fiscal deficit below 3%, public debt/GDP is below the government cap of 40% and the current account deficit has shrunk to 3% of GDP.
We have exposure to the country through London-listed Georgia Capital – which has a diverse portfolio spanning pharmacy, insurance, renewable energy, water utilities and a large stake in Bank of Georgia. While the company trades on a NAV discount of more than 50%, we are optimistic about the strength of many underlying assets of Georgia Capital and expect the company to continue unlocking value over time.
Johannes Loefstrand is portfolio manager of the T. Rowe Price Frontier Markets Equity strategy. The views expressed above should not be taken as investment advice.