Franklin Templeton: Frontier Markets Are Undervalued

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Frontier Markets represent countries that are one step below than emerging markets and are the riskiest. These markets include countries such as Morocco. Pakistan, Vietnam, Argentina, etc. The MSCI Frontier Markets Index gives exposure to 30 countries.

A recent post by Carlos Hardenberg at Franklin Templeton Investments discussed some of the myths around the frontier markets. According to him, these equity markets are undervalued based on P/E ratio relative to emerging and developed markets. From the article:

Attractive Valuations with Limited Correlation

When we talk about the attractiveness of frontier-market investing, the single most important factor for many investors tends to be valuations.

Currently, frontier market equities are trading at what we consider very cheap valuations compared with both developed and emerging market peers, as the first chart below shows.

At the same time, as an asset class frontier markets have traditionally had very little correlation1 with emerging markets such as China, Brazil or Indonesia, or with developed markets including the United States, Japan or the United Kingdom.

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1. Correlation measures the degree to which two investments move in tandem. Correlation will range between 1 (perfect positive correlation, where two items historically have moved in the same direction) and -1 (perfect negative correlation, where two items historically have moved in opposite directions).

Source: Busting the Frontier-Market Myths, Franklin Templeton, June 1, 2017

Here are a few points to consider before jumping into frontier markets:

  • Since frontier countries are the most riskiest, investing in these markets are not suitable for every retail investor.
  • Even those who want to invest in them should limit their allocation to a tiny portion of their portfolio.
  • The MSCI benchmark index has a dividend yield of 3.93% compared to just 2.41% for the MSCI World Index.
  • Liquidity is a major issue in frontier markets since they are very tiny compared to developed markets. So in times of declining markets it may be difficult to get out.
  • These countries are plagued by governance issues, transparency issues, political stability, corruption and other social ills.

Related ETFs:

  • iShares MSCI Frontier 100 ETF (FM)
  • Guggenheim Frontier Markets ETF ( FRN)

Disclosure: No positions

Also checkout: 2020 vision: the changing face of frontier markets, Money Observer

The Top 20 Countries in Europe by FDI Projects in 2016

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Europe attracted 15% more Foreign Direct Investment (FDI) in 2016 than the year before. The top three countries for FDI are: the UK, Germany and France. Intra-country investment within Europe remains the largest FDI in Europe. The US is the second largest Foreign Direct Investor in Europe.

The Top 20 Countries in Europe by FDI Projects in 2016 are shown in the table below:

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Source: E&Y

 

Why Investors Should Not Sell Stocks During A Market Correction

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One of the important traits that successful investors have is emotional control. While it is easier to watch a portfolio grow during bull markets the same cannot be said during bear markets when stocks can go down 50% or more or even to near zero. In such scenarios, the key is to keep calm and focus on the long-term goal and not panic. Simply selling out everything at the peak of a brutal market correction is not a wise strategy. For example, during the market correction during 2008-09, some investors panicked and sold their stocks at the worst time around early 2009. Since the lows of early 2009, the S&P 500 has more soared by more than 250% based on price only. So investors that had the misfortune of liquidating their holdings back then lost out this astounding return when US stocks rebounded with a vengeance.

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Note: Chart shows data till May 26, 2017

Source: Google Finance

According to an article by Dianne Lob, Scott Krauthamer at Alliance Bernstein, stocks have usually rebounded sharply after large intra-year declines. The S&P 500 has exhibited this phenomenon in the past 20 years. From the article:

Market trends also require context. At some point during 20 of the last 37 years, US equities have been hit by a peak-to-trough decline of at least 10% (Display). These episodes always trigger anxiety and make investors search for the exits. Yet, the bounceback is often very quick. Stocks have posted full-year declines in just six of those 20 years.

Dumping stocks during a decline is usually a mistake. Since stocks have delivered positive annual returns in most years, getting out of the market during a sharp correction often means locking in losses and forfeiting returns in a rebound. And it’s almost impossible to time market inflection points.

Today’s extremely low volatility levels have reinforced investors’ complacency. It’s easy to forget how often equity corrections happen—and how quickly the market tends to rebound. That’s why it’s so important to keep the historical context in mind before the market takes a hit.

Source: US Equity Correction? Prepare, Don’t Panic, Alliance Bernstein, May 25, 2017

Below are a few points to keep in mind when markets enter a correction phase:

  • Keep calm and carry on as usual.
  • Be patient when the media scares everyone and it seems like the world is coming to an end.
  • Do not suspend dividend reinvestments unless there is a need for cash.
  • If available, deploy cash to work by buying high-quality stocks cheap when they get dumped with other stocks.
  • Perform tax-loss harvesting or Traditional IRA to Roth conversions if needed for tax purposes. These technics are applicable to US investors only.

Related ETF:

  • SPDR S&P 500 ETF (SPY)

Disclosure: No positions