Frontier Markets
How to Invest in Philippines?
Among the frontier markets, investors have often overlooked the Philippines. With a population of about 91 million and a stable manufacturing and service-based economy, the country offers several good investment options. Goldman Sachs included Philippines in its “Next Eleven” list of countries. This year the economy is projected to grow 3.6%.
Some of the reasons to invest in Philippines include:
- Banking sector appears resilient
- The capital adequacy ratio of banks exceed the minimum required
- Economy is less dependent on exports than many other regional peers with exports-to-GDP ratio around 30%
- Inflation is mild and is under the target range set by the Central Bank
- Financial markets has rebounded due to strong overseas remittances, macroeconomic policies and renewed confidence
- The current account remains a surplus
- Many companies in the telecommunications, energy, property,banking and retail trade sector are owned by conglomerates
- Many of its major trading partners are in fast-growing Asia
Source: IMF
According to a recent article, the banking and utility sector has interesting opportunities for investors.Currently there is no country-specific ETF for Philippines. However in February, iShares filed papers to launch a Philippines ETF. This ETF will be heavily concentrated in utilities, telecommunications and financials.
The Philippine Long Distance Telephone Company accounts for about one-fourth of the benchmark PSE Composite Index. Its ADR trades under the ticker PHI in the New York Stock Exchange. It has a dividend yield of 6.17%. The company is well-positioned in the industry and is expected to experience accelerated growth with its broadband service. Some of the largest companies such as Ayala (OTC: AYALY), Globe Telecom (GTMEY), Metropolitan Bank and Trust Company(OTC: MTPOY), etc. trade on the OTC markets. The complete list can be found here.
Forget Emerging Markets and Choose Frontier Markets in 2010?
While many of the investors are focused on the emerging markets, some brave and sophisticated investors are looking beyond the horizon and venturing into the frontier markets. Some examples of the frontier markets are Saudi Arabia, Kuwait, Morocco, Algeria, Lebanon, Colombia, Vietnam, etc.
The prevailing low interest rates in many countries around the world and the rising demand for commodities are two of the reasons that are advantageous to frontier markets. For example, rising crude oil and natural gas prices are benefiting Kazakhstan. Saudi Arabia, Qatar, Nigeria, Oman and Kuwait are profiting from higher crude oil prices.
The performance of a select few frontier markets and India, China are shown in the following chart:
A recent research report noted:
“Mark Mobius, executive chairman of Templeton Asset Management believes frontier markets represent some of the best contrarian investments at the moment.
Mobius, who manages a number of emerging markets portfolios at Franklin Templeton, considers countries such as Vietnam, Pakistan, Bangladesh and Romania as ones to watch this year. He says he currently favors commodity and consumer orientated stocks. Qatar, Kazakhstan and Nigeria are being watched because of their natural resources.”
A huge bubble is forming in the emerging markets of India and China especially in the real estate sector. This does not portend well for the future. The real estate bubble in the US lead to the credit crisis bringing the global economy to its knees. Hence it may be the time to explore some of the frontier markets. However frontier markets are not for the faint-hearted. So extreme caution is needed before jumping into any of these markets. Equities in frontier markets may be highly illiquid and information may not readily available to evaluate companies.
Some of the Frontier Market ETFs include:
Claymore/BNY Mellon Frontier Markets ETF (FRN)
Market Vectors Gulf States ETF (MES)
Market Vectors Africa ETF (AFK)
Market Vectors Vietnam ETF (VNM)
WisdomTree Middle East Dividend Fund (GULF)
SPDR S&P Emerging Middle East & Africa ETF (GAF)
Should You Invest in the Land of Komodo Dragons?
Komodo dragons are the world’s heaviest living lizards.They can grow to an average
length of 10 feet and weigh about 200 lbs. Komodos are found primarily in the Lesser Sunda Islands of Rinca, Komodo, Flores and the smaller islands of Gili, Montang and Padar in Indonesia.
The country of Indonesia has a population of about 229 million with the majority of them following Islam. During colonial times, the nutmeg plant attracted Europeans - especially the Dutch - to Indonesia who ruled the country until its Independence. In modern times, Indonesia is a large natural resources exporting country with the major commodities being crude oil, natural gas, tin, copper and gold. Indonesia’s major trading partners are China, Japan, Singapore and the U.S.
In a special report titled Chindonesia published in July, CLSA Asia Pacific Markets stated some of the reasons that make Indonesia an attractive investment destination. The important points from this report are listed below:
- Indonesia is a marginal supplier of natural resources to China and India, two of the world’s fastest growing economies
- The country has a youth population and about 22 million more people are projected to join the workforce in the next decade
- The GDP per-capita growth in recent years has been strong
- Indonesia is the world’s largest exporter of palm oil and will profit greatly when the demand for palm oil from China and India doubles by 2014
- Indonesia is the largest exporter of thermal-coal exporter and China is the world’s largest importer of this type of coal
- The country largely avoided the global financial crisis
For US investors, the Market Vectors Indonesia Index ETF (IDX) offers a simple and easy to invest in Indonesia. The fund was launched on January 15th this year and has an asset base of about $181M, which is good for a frontier market fund. The expense ratio is 1.08%.
Another way to invest in Indonesia is via the closed-end equity fund, The Indonesia Fund (IF).
To answer my title question, yes one must allocate a small portion of their portfolio to Indonesia. As a frontier market it has many risks including political risks, currency exchange risks, etc. But since the country has many commodities that the world needs and is one of the large economies in the world investors may not go wrong by gaining some exposure to this market.
Four Frontier Market Stocks
Frontier markets are the so-called next emerging markets. While investing in emerging market economies like Brazil, Russia, China, India takes a strong stomach, investing in frontier markets require nerves of steel. Frontier markets are those lie outside of the realm of emerging market investors and they can be considered the “Wild West” of the investment world.
Some of the frontier markets include the middle eastern countries such as Dubai, Saudi Arabia, the countries of Sub-Saharan Africa such as Nigeria, Burundi, etc., Asian countries such as Philippines, Indonesia, etc. and Latin American nations of Colombia, Costa Rica, etc. These markets started to appear in investing universe in 2007,2008 when some global investors looked for much higher returns.
In this post lets review four stocks from such markets.
1.Banco Latinoamericano de Exportactns SA (BLX) is “a supranational bank originally established by the central banks of Latin American and Caribbean countries to promote trade finance in Central and South America and the Caribbean (the Region). The Bank operates under the commercial name of Bladex” based in Panama City, Panama. The current yield is 8.85% and the bank has a market cap. of about $301 M. BLX has performed relatively well in the last 52 weeks since it is down only 36%. Out of the30.6 M shares outstanding 57% is held by institutions.
2. Philippine Long Distance Telephone Co (PHI) is a telecom provider in Philippines with about 32 million subscribers. Last year the company had a total revenue of $1.4B and revenue has grown at a rate of 17% annually. PHI pays a dividend of 6.65%.
3. Colombia-based petroleum company EcoPetrol SA (EC) was listed in the New York Stock Exchange last September. EC has a dividend yield of 5.91%. EcoPetrol “is among the top 40 oil companies in the world and the four chief oil companies in Latin America. Besides Colombia, where over 60% of domestic production is concentrated, the Company is involved in exploration and production activities in Brazil, Peru and the United States (Gulf of Mexico).”
4. The financial services holding company Creditcorp Ltd (BAP) operates in Peru. BAP provides commercial banking, investment banking, insurance and retail banking. The current yield is 3.50%. Annual revenue growth in the last 5 years is 20.5% and the dividend growth is 45%.
For a few frontier market closed-end funds and ETFs checkout my earlier article A Few Frontier Market Investment Ideas
A Few Frontier Market Investment Ideas
The developed markets are in the bear’s grip for many months now due to the credit crunch. Investors looking for better returns went to emerging markets like Brazil,India, China, etc. last year and even early this year.But that strategy is not working anymore since the emerging markets have plunged as well.My friend Vlad highlights some of the emerging market indices in the article titled Emerging markets indexes.
So this year investors are going to unusual places to invest. These are countries like Vietnam, Egypt,Peru,Indonesia,Romania, etc. Together these extremely risky markets are called “Frontier markets”. Already this year, ETF providers have luanched many ETFs for the frontier market countries.
In this post, lets look at a few ADRs,funds to invest in the frontier markets:
1.Credicorp Ltd. (BAP)
Credit Corp is a banking company in Peru.The stock has had an incredible year run as the chart shows below.BAP has a PE of 13.05 and a dividend yield of 2.10%. Beta is 1.1.The average annual dividend growth for the past 5 years is 45.41%.
Chart: 5 Year Growth
2.Indonesia Fund (IF)
IF is a closed-end fund now trading at a discount of -11.24%.This a small fund with assets of just $106M.
3.Thai Capital Fund (TF)
TF is a closed-end fund now trading at a discount of -9.93%. This a small fund with assets of just $41M.TF is down YTD some 26%.
4.Turkish Investment Fund (TKF)
This CEF has an asset base of about $111M and it is down some 26% YTD.
5.Philippines Long Distance Telephone Co (PHI)
Telecom company in the Philippines.with a high dividend yield of 5.14%.
Again the above investment vehicles should be carefully evaluated before adding them to a well diversified portfolio.
