Fast-Growing Frontier Markets During a Global Economy Slowdown

Getty Images / Thierry Dosogne.

Low interest rates have led to valuation concerns in many of the world’s largest markets. According to Multpl, the S&P 500 trades at a lofty price-earnings multiple of 25.25x that’s well above its mean of 15.61x. Emerging markets have become an attractive alternative with the MSCI Emerging Markets Index trading with an average P/E ratio of just 12x. But, the MSCI Frontier 100 Index trades at an even more compelling 11.4x ratio with a better outlook.

In this article, we will take a look at some frontier markets that international investors may want to consider for their portfolios over the coming quarters.

Pakistan’s Booming Economy

Pakistan’s economy is the 38th largest in the world based on nominal gross domestic product (“GDP”). With a population of over 190 million and an average age of just over 21 years, the country has extremely favorable demographics to boost its long-term economic growth prospects. The country’s historic growth rates haven’t reached the level of many emerging markets, but economic liberalization and growing investment could accelerate the economy.

The most popular Pakistan-focused exchange-traded fund (“ETF”) is the Global X Pakistan ETF (NYSE ARCA: PAK), which has roughly $11 million in assets under management as of September 2016. Despite its small size, the ETF has delivered nearly 25% gains over the last six months and still offers a modest average price-earnings ratio of just 10.21x.

The fund also offers an attractive 30d-ay SEC yield of 4.33% that might benefit income investors.

According to ETFdb, two other ETFs also offer exposure to Pakistan’s economy, including:

  • iShares MSCI Frontier 100 ETF (NYSE ARCA: FM) – 11.08%
  • Guggenheim Frontier Markets ETF (NYSE ARCA: FRN) – 10.14%

While Pakistan’s future may look bright, there are several risks that international investors should carefully consider.

The most significant risk is that of currency devaluation, reduced support from the International Monetary Fund (“IMF”), or political risks.

Argentina’s New Leadership

Argentina is Latin America’s third largest economy and the 21st largest economy in the world based on nominal GDP. With significant natural resources, a highly educated population, and a diversified industrial base, the country has long held potential as a leader in the region if it weren’t for corrupt politicians. The good news is that newly elected Mauricio Macri has implemented policies aimed at taming inflation and turning around the economy.

The most popular Argentina-focused ETF is the Global X Argentina ETF (NYSE ARCA: ARGT), which has nearly $73 million in assets under management as of September 2016. With a 21% return over the past six months, the ETF has become a popular way to gain exposure to a country in the midst of a turnaround. The country’s 25.64x price-earnings ratio may seem lofty, but its strong growth rates could justify the premium valuation.

According to ETFdb, investors may also want to consider these other Argentina-focused ETFs:

  • iShares MSCI Frontier 100 ETF (NYSE ARCA: FM) – 17.41%
  • Guggenheim Frontier Markets ETF (NYSE ARCA: FRN) – 9.18%

    There are two big risk factors that investors should consider before committing capital in Argentina’s economy. First, the economy is still relatively fragile after a big currency devaluation and it could take a couple years to move into a growth trajectory. Second, investors have placed somewhat of a premium on the country’s equity markets given its potential for a turnaround, which may have diminished some of the upside on a risk-adjusted basis.

    Other Options to Consider

    International investors may want to consider other frontier markets in addition to Pakistan and Argentina. For example, Vietnam offers a valuation that’s between the two with a structurally sound economy and a reform-focused government in power. The country’s demographics are also attractive with a young working age population.

    The VanEck Vectors Vietnam ETF (NYSE ARCA: VNM) is a great way to capitalize on the country’s future potential.

    Of course, investors can also take a diversified take in all major frontier markets with the iShares MSCI Frontier 100 ETF (NYSE ARCA: FM) or the Guggenheim Frontier Markets ETF (NYSE ARCA: FRN). These ETFs provide roughly 10% exposure to each major frontier market, which helps ensure that investor portfolios are kept well diversified. They also have reasonable expense ratios given the difficulty of investing in these markets.

    The Bottom Line

    Frontier markets may be worth a second look as developed market equities become increasingly expensive. With attractive growth rates and price-earnings ratios, investors may want to consider diversifying into these markets as a way to boost returns and yield.