T Rowe Price's Bell: the key to frontier markets
By Selin Bucak 24 Mar, 2015 at 09:39
T Rowe Price’s Oliver Bell says understanding that occasional crises will happen in frontier markets is the key to outperformance.
Citywire A-rated Bell believes that most of the characteristics of frontier markets have been seen 20 years ago in what are now considered mainstream emerging markets.
The growth is a structural one. While there is cyclicality to it, it does not rely on the global cycle. It is about domestic structural growth from a very, very low base, so it could be sustained for a long time,’ he said.
‘While we cannot completely ignore the global currents, I think these set of markets at this time will be less impacted by it. They are on their own paths at the moment. While emerging markets seem to be hostage to global events, these are not.’
Bell says most of the frontier markets are now looking to attract capital into their economies to fund growth. While most of the countries want stable currencies in order to achieve their goals, interest rates are often being kept at higher levels than they need to be.
As with any region, frontier markets come with their own set of problems and risks, but Bell believes he can navigate through those difficulties.
It has certainly not been an easy ride since the fund was launched last June, but it has preserved capital better than the MSCI Frontier Markets index, falling by 4.3% compared with its benchmark’s 13.93% drop.
In part, this was through being underweight energy during the oil price collapse with just 2.9% exposure compared to the index’s 10.7% weighting.
‘A lot of the recent outperformance is because we have been very light in any oil related companies or countries. There are more countries in frontiers that import oil than export. Those that export oil are much bigger in the index. The headline risk in the asset class is it is quite oil heavy,’ he said.
‘If you are an ETF, you are not going to get any protection on the downside. Understanding the occasional crisis is the key to outperforming. This is probably the most inefficient set of markets globally, so passive funds will have trouble.’
Investing in mini-India
Bell says he is finding interesting opportunities in frontier Asia and he focuses on Sri Lanka, Vietnam and Pakistan.
He points to the president of Sri Lanka calling a snap election in January in which he was subsequently defeated and had to hand over power to the opposition. Bell sees this as a positive development for the country because the new government shows signs of being a more inclusive regime, which is also set to increase expenditure on infrastructure.
After the parliamentary elections in June, he is waiting to see if these reform promises are followed through.
Nonetheless, for Bell, Sri Lanka is a mini-India. He points out that the country has the most educated population among frontier countries and better access to healthcare. But because of its size, it is a nimble version of India, which is why he is overweight with 11.1% held in the country.
‘The companies are really interesting. They are relatively cheap, very well run with strong potential for growth,’ he said.
In consumer names, he holds Ceylon Cold Store and Nestlé Sri Lanka, while in the financials sector, he finds value in Hatton National Bank.
He is also overweight Vietnam, which is leaving a troubled past behind and rebuilding. Coming out of a property crisis which escalated into a banking crisis, Vietnam’s economy is finally stabilising, Bell said.
As property prices show signs of stability and begin to rise, the banking system has also started to repair itself.
‘This is quite an interesting time for the country. If you add in the labour cost, which is one third of China’s, a lot of manufacturing capacity is going to Vietnam instead of China. Textiles used to be their largest export, now mobile phones are their largest export. Samsung Electronics exports about $1 billion in mobile phones from the country. Foreign investment is very high,’ he said.
In Pakistan, Bell believes despite how the country is typically portrayed in the news, on the ground there are exciting developments that continue to attract foreign capital. The new government, which was handed power peacefully in a significant development for the country, is reform-minded with a focus on privatisation.
With political upheaval having died down, Bell thinks the country is looking attractive especially with the privatisation of the power sector. He is currently invested in Nestle Pakistan and TV broadcaster Hum Network.
‘We would like to have more in Pakistan but finding those high quality companies is slightly more challenging than in other Asia frontier countries.’
Bell very much takes a bottom-up approach when investing, but he does not ignore the larger political or macroeconomic factors.
‘We are trying to find high quality growth companies. The only reason we would not invest in a company is if we were concerned about politics and macroeconomics,’ he said.
‘In Kazakhstan, there are a couple of companies we like but our fixed income team thinks there could be a major devaluation of currency. So we will not invest until we see that devaluation. We will not invest until we are happy the macro environment is not going to detract from performance.’