You are on page 1of 49

Frontier Markets

ValueX Berkshires 2014

A clearer path
By Brian Langis

Brian is reachable


Presentation Overview
What are frontier markets?

Why invest in frontier markets?

When to invest?
How to invest?
Where to invest?
Bonus Super Exotic Extreme Investing

Why the Frontier Markets topic?

Canada is 3-4% of the worlds market cap

The Toronto Stock Exchange is ~33% Energy, ~33%

Financials, then three big telecoms

U.S: ~5% of the world population. Not 100% of investments
New opportunities + growth + diversification
Not an us vs them. Developed world is still an excellent
place to invest.
But the world today is different than the world twenty years
ago. Dont want to be left behind.

What are Frontier Markets?

Formally known as Third World Countries

Early stage of development - Good economic growth

Next wave of emerging markets
Young population, rising income, growing middle class
Little market liquidity
Marginally developed capital markets
Yet to undergo much meaningful economic development, the
potential for rapid growth and outsized returns make these
markets interesting to high-risk investors.

Source: Bloomberg L.P.

What are Frontier Markets in Numbers

30% of worlds population

13% of worlds GDP

Less than 3% global market cap
70% of countries with stock exchanges are not represented

by the MSCI All-Country World Index.

3% - Market Cap to GDP Ratios
23 of 25 fastest growing countries over the next 5 years are

Source: IMF, Bloomberg, World Bank, MSCI index

The line is blurry

MSCI - designates which group many economies belong to.

South Korea, developed according to FTSE but emerging

according to MSCI.
FTSE, World Bank, IFC and others have different
classifications system.
EMs and FMs are often lumped together.

FMs vs EMs
Emerging Markets:

Already achieved economic lift-off

Some economic output comparable to developed economies

(China, Korea)
Stronger institutions
More correlation and integration with global market
Not as cheap, many more investors, a lot more coverage
Easy economic reforms already achieved
More efficient markets

FMs vs EMs
October 31, 2013 to October 31, 2014

iShares MSCI EM vs iShares MSCI FM

Source:Yahoo! Finance

Developed Countries
Most of the major asset classes appear fully valued

Significant challenge of finding growth in a slow-growth

High levels of public and private debt
Political dysfunction
Aging populations among other problems
Reliable legal framework, more transparent, fully liquid.

Perception vs Reality

Highly indebted /Poor fiscal shape

Wild Wild West of investing
Corruption, you have to bribe to get ahead

Poor corporate governance


Too commodity oriented

Malnourished kids, genocides, despots, disasters, despair

Growing middle class. Wage increase. (Buying cars, home, goods)
Lower debt-to-GDP ratios than developed markets. (Mostly

infrastructure debt)
Corporate governance is increasing
IMF: Around 70% of world growth over the next few years will come
from emerging markets.
Low correlation to global assets
Profits mostly dependent on local factors.
The financial crisis and banking crisis was not a feature of African
Less volatile than Emerging Markets FTSE
Move from commodity-oriented growth to economies that emphasize
innovation and knowledge.

Perception: True Size

Photo Source: LeftL Right: Kai Krause

Why Invest in Frontier Markets?

Its about showing up to the party early. First-mover advantage.

You get a head start. Theres a lot of punch left to drink.You get
the best deals before the herd shows up. (Selling to the herd
should be profitable.)
Capturing where the growth is going to be
The point is to invest in the BRICs before it was cool.
Imagine investing in after WWII Japan, or Korea, or Thailand forty
years ago. Its sounded crazy, very contrarian.
Still a lot of untapped resources.
Government reform efforts also present the potential for both
earnings growth and revaluation for frontier-market companies.

Why Invests in Frontier Markets

High need for infrastructure development

Need FDI for everything
Low cost workforce
Low correlation to rich countries
Attractive valuation
Higher growth
Financing options limited
Technology leapfrog
Reverse brain drain
Very inefficient. Limited information with limited liquidity drive
major price/valuation swings.

What To Look For?

Having the right demographic is not enough

You need legal framework. Can foreigners get a fair deal?

Open to foreign investors.
Free market principles, pro-business
Stable government/regime
Quality of the potential investable companies.
Development of capital markets
The right policies. Pay attention to policies that encourage
economic growth.

The Right Recipe

South Korea Asian miracle II
Japan Asian miracle I

Singapore no natural resources, rich country

Thailand Attracting high-tech
Botswana big strides in governance

The Wrong Recipe

Argentina, the Paris of South-America, Formerly one of the richest

country in the world.

1962 Myanmar, richest country in Asia.

2012 Mongolia
Current France?

When To Invest In FMs To Get the Best

When the outlook is the most miserable

Ignored due to multiple reasons

The herd hot money hasnt showed up yet.
Interesting after a war, a crash, a recession, cycle

Major reforms on the way
The reasons above give you the best deals, low PEs
Stay out when theres a mania.

Where To Look?
Worlds worst stock market returns

The end of a recession.

The end a bear commodity cycle.
The end of a war.
Look at foreign stock exchange listing.
Look at 13F filings of funds or list of holdings
Read portfolio manager comments
Change in index component
Domestic country newspapers/news sites

Foreign stock exchange
Foreign broker firms
Foreign papers
Industry association
Fund investments disclosing
Foreign Chamber of Commerce
Foreign financial sites

General Risks
Limited size, lack of liquidity, thinly traded

Family run companies / Poor governance

You can take on too much risk
May not follow the same rules of disclosure as Western

Capital control
Monitor changes in index components.
Geopolitical and currency risks are real.
Factor in costs and fees.
Export Dependencies
Strong USD

General Risk Continues

Ability to commit capital to any national market in large

volume, they are also capable of withdrawing that capital

Anything from signs of weak earnings growth to an

unanticipated rate hike somewhere else in the world can

trigger a shift in sentiment and precipitate capital flight.

Be careful of countries too dependent on commodities

Advice Approach
Macro factors such as GDP growth, the level of interest rates, et

cetera are less important in deciding whether to invest in a given

Be skeptical of local brokers/analysts
Always bullish, otherwise is seen as a traitor
Usually after own interest (Want money to increase fund size)
If bearish, will lose job, potential government business, and corporate

finance deals

Academic papers (guess who paid the academics)

Dont rely too much on statistics. GDP often understated.

(Bartering, household, underground economy etc)

The emergence of the middle class in country X these are
gimmicks, just marketing stories for fund managers.

Advice Approach
If direct stock picking, do not ignore management. Good

management reduces a lot of the risk.

Spend your time on businesses that you can understand better.
Focus on the Blue Chips. Find the best companies in the world.
Dont be a cowboy. Would you invest in it even if it was American?
Prefer dividend paying Co. Can fake earnings. Cant fake dividend.
Shareholder oriented.
Pick a broker that is recommended by Westerners or has Western
roots. Be careful of front selling.
Its good too double check with two different local brokers.
Do business with the biggest bank
Verify if the auditor is a familiar name

Friction or extra cost
High commissions
Duties, Stamp duty
Share registration, custodian
Language and culture

Approach management like you are building your fantasy

football team.
Study their history and experience, operating and capital

You can hire firms for background check.
Shareholder friendly?
Be skeptical of strong family run companies

How To Invest?
Developed world Multinationals

Multinationals offshoot
Direct stock picking
ETFs/Mutual Funds

Private Equity Funds

Debt market

FM companies getting listed on a major exchange. (FTSE,


Frontier Market Multinationals

Notable Real FM Countries

Myanmar Massive change in political direction

Sri Lanka 26 years of civil war ended in 2009.

Iraq War ending soon?
Cambodia, Laos Two SEA countries thats catching up. New

Nigeria Biggest African economy
Ghana + Kenya Major reforms, fast growing
The BRVM exchange 8 West Africa Countries. 37
companies +66% 2yr return.

A New Frontier
Myanmar - Reopen for business

GDP growth 8%. GDP to triple in the next twenty years.

Strategic location. Port, trade, etc
Need FDI in everything
Reforms under way
Elections of 2015 will be huge
Risks: Ethnic clashes, corruption, legal, banking, a lot of

unknowns, etc

Source: IMF, Mckinsey

57 countries, 19 stock exchange

African companies getting listed on the FTSE.

Nigerian banks: P/E 6x, P/B 1.2, 20% capital ratio.
Kenya banks: more expansive 2x P/B, but more sophisticated

(credit cards, home loan, etc)

Shoprite Food retailer in 16 countries, 1700 stores
Sonatel EBITDA margin 51%, ROE 32%, 7.3% div
Enterprise Group Limited P/E 2014 8.4x, P/B 1.6x, 2013
ROE 27.4%

Frontier Market Industries

Some stand out more: financial services; consumer goods and

services; hotel and tourism; selected property segments;

power, manufacturing and export driven industries.
Renewable energy and agriculture are interesting because
there is a lot of support from the development banks.
Consumers do shop. Buy basic goods and services.
Shift from agriculture and textile to manufacturing. Adopt
latest technology.

Notable Frontier Market Companies

Yoma Strategic (Singapore company in Myanmar)

Square Pharma Bangladesh Blue chip

GT Capital Philippines (large bank + power + Toyota
PPWSA Cambodian water distributor/management

BCEL, EDEL Lao bank and energy powerhouse

NagaCorp Casino monopoly in Phnom Penh
Bidvest Group South African conglomerates
Dangote Multiple African countries
Zain Kuwait telecom, 49% Iraq and 41% Sudan
John Keells Holdings Sri Lanka (hotel, food, ports)
Thai Beverage PLC - One of SEA's largest beverage companies

Phnom Penh Water Supply Authority

Fiscal 2013 Numbers / US$

Water utility company, $1.22/share, $106 million market cap

Price below 2012 IPO of $1.55

Revenue $37.2m, yoy +12%
Profit $9.3m, EPS: $0.107, yoy+10.6%

ROE 5.62%
ROA 3.62%
Current and Quick Ratio 4.2x and 3.4x
Dividend Payout Ratio 12.50% (2012: 7%)
Dividend per share: $0.013 (2012: $0.006) +116%
Great management, 99% billing collection, monopoly
Valuation: Forward P/E 10x, P/B: 0.62x,

Frontier Market Multinationals

Source: Source: Forbes, May 2014. * Excluding financial institutions

Global Multinationals
Nestle, Unilever

YUM! Brands (KFC is always the first)
Total SA (Iraq, Iran, Kazakhstan, Africa)
Philip Morris International
Diageo, Pernod Ricard, Brown-Forman
Heineken, Anheuser-Busch InBev, SABMiller
Compagnie Financiere Richemont S.A.
Value investor Tom Russo specialize in that area.

Notable Funds/ETFs
iShares MSCI Frontier 100 ETF (FM)
ASEAN ETF - Global X FTSE ASEAN 40 ETF (Singapore,

Thailand, Indonesia, the Philippines and Malaysia)

Templeton Frontier Market Fund
Frontaura Global Frontier Fund (Pure)
Matthews Asia (Many Asian funds)
Africa Opportunity Fund Francis Daniels
Asia Frontier Capital - Pan-Asian + Vietnam

Templeton Frontier Market Funds

AUM $2 billion,70 companies, 40% financials, MER 2%

P/E = 11.3x
P/B = 1.94x
P/CF = 7.59x
5yr annualized return: 7.73%
Top holdings: United Bank LTD, Zenith Bank PLC, Telecom

Argentina SA.
Includes Saudi Arabia, MSCI does not.

As of September 30, 2014

Frontaura Global Frontier Fund LLC

AUM $175m, 55 companies, 33 countries, 41% financials,

16% cash, MER 2%

P/E: 6.1x
P/B: 1.1x
Dividend yield: 5.3%
ITD CAGR (Oct. 2014): 10.a% vs -2.2% MSCI Frontier
(Seven years)
Top holdings not disclosed

Africa Opportunity Fund

Code AOF. Managed by Robert Knapp and Francis Daniels.

Value and contrarian.

56% annualized return between 1998-2006
Read: Reflection of a Value Investor in Africa.
Great way to buy into the African story.

Notable Region - ASEAN

300 million people
10 + 5 countries
Trading/political block. Free trade
Combined market cap: +$2 trillion
High GDP growth

Sources: Financial Times, The World Federation of

Exchanges, China Daily

Foreign Subsidary
(Direct and Indirect)
Nigerian Breweries 54% Heineken
Guinness Nigeria Diageo 46%
Nestle Nigeria
East African Breweries 53% Diageo
Unilever Indonesia
Sonatel 42% owned by France Telecom
Tanzania Breweries 54% owned by SABMiller

Bonus Extreme Investing

For informational purposes.
Do your own research.
Not an investing recommendation.

Information need to be verified.

This is not an endorsement.

Extreme Investing
Defaulted North Korea Bond from the 1970s for about

~0.15 on the dollar. The interest accrual, since their 1984

default, amounts to more than 500 percent of the principal in
unpaid interest.
Orascom Telecom (EGX:OTMT) 1m+ subscriber in NK.
Owns 25% of Koryolink. Only 4% mobile penetration.
Invest in Chinese companies operating in NK.
South-Korea companies operating in NK
Alternative assets: Coins, stamps, art.
Special Economic Zones on the rise. (Rason)

NK Mobile Connections

More Exotic Investments

The worlds first pirate exchange, Harardheere, Somalia.

Open 24 hours a day, the exchange allows investors to profit

from ransoms collected on the high seas, which can approach

$10 million for successful attacks against Western
commercial vessels.
Theres now approximately 72 maritime companies.
You can provide cash, weapons or useful materials.
Ransoms collects between $2 to $4 million. $9.5m for
the Smyrni, a Greek tanker.
Risk: Attacks are dropping. 237 attacks in 2011, 75 in 2012,
15 in 2013. Is the market hitting a bottom?


People gather outside a former local bank, where pirates were dividing ransom payment
obtained for the freeing of the Spanish ship Alakrana, as they wait to collect their money in Haradheere,
northeast of Somalia's capital Mogadishu, November 18, 2009.
REUTERS/Mohamed Ahmed

At the end of the day this is what

Dont buy a stock because its from an exotic high growth

Valuation. Buying below its intrinsic value. Value < price.
Low/reasonable valuation.
Margin of safety
Adjusted EBITDA good for comparing cross-country
Predictable, consistent cash flow
Look for increasing FCF, and ability to re-invest
Reliable financial statements
Excellent management/partners