Pakistan is a Rising Star Among Frontier Markets For Multinational Corporations

[Riaz Haq]

#Pakistan is a rising star for multi-nationals in frontier markets along with #Nigeria, #Argentina, #Vietnam http://on.wsj.com/1p2g16O

After a recent survey by Japan External Trade Organization (JETRO) showing Pakistan seen as top growth market by Japanese multi-nationals, here comes another encouraging report in the Wall Street Journal.

Here's an excerpt of a Wall Street Journal story on Pakistan leading positive sentiments increase among top 20 frontier markets:

The corporate world’s fascination with Africa shows through clearly in the rates of change of sentiment, too. The data compare an average of corporate sentiment for year-to-date 2014 with an average of the results over the full-year 2013.

Four of the five countries with the highest positive change in sentiment are in sub-Saharan Africa, as well as seven of the top 10.

Pakistan, though, is ahead of the pack in terms of the number of companies newly taking an interest in it. Sentiment toward the South Asian nation of 183 million people improved by 5.6 percentage points, putting it ahead of Africa’s rising stars Nigeria and Kenya, which each saw sentiment improve by just over four percentage points.

In absolute terms, though, Nigeria is still the clear leader among the three with twice the number of companies in the index considering investing there. Nearly three in 10 companies have Nigeria on their watch list.

By contrast, Pakistan’s South Asian neighbors Bangladesh and Sri Lanka appear to be losing their appeal, with each seeing the number of companies focused on them slashed by more than half.

Myanmar, which has only recently emerged as a potential destination for investment, saw a similar decline in corporate interest, with a meager 4% of companies including it in their watch list. Companies’ waning interest in Myanmar most likely reflects the realization among executives that the country is far from ready to receive significant foreign investment in most sectors.

Not surprisingly, the country that saw the greatest decline in attention from multinationals was Ukraine, whose 12.5-point decline was almost double that of the next-worst performer, Oman. While financial investors have seen healthy returns from their high-risk bets on the tumultuous central European economy, businesses are looking elsewhere for long-term opportunities.

Overall, sentiment toward frontier markets among the 200 or so multinationals included in the survey declined. All but 14 of the 70 countries covered in the survey have seen the level of corporate interest in them subside since last year.

Mr. Lasov believes the slide is less about the fundamental appeal of newly emerging markets and more about the revived interest in the developed world. “In the past few years, there has been a rebound in developed markets, which has attracted companies’ attention,” he says. “At the same time, companies have looked at the frontier markets and realized that many of them have tiny populations, so to build a business or manage a business in these smaller markets may not be worth the time.”

http://blogs.wsj.com/frontiers/2014/06/06/nigeria-argentina-and-vie...

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[Riaz Haq]

Here's Wall Street Journal on Pakistan's outstanding stock market performance up 88% since Jan 1, 2013:

Investors who ventured into frontier markets—the smaller, lesser-known cousins of emerging markets—have been rewarded with impressive equity returns over the past 18 months.

While the MSCI Emerging Markets Index has been essentially flat since the start of 2013, the MSCI Frontier Markets Index has shot up by more than 50%. Developed markets grew strongly too, but the 32% surge in the MSCI World Index was still dwarfed by frontier markets’ growth.

Individual countries have posted some significant returns, too. Since the start of 2013, Bulgaria’s market has soared 91%, Pakistan’s has jumped 88%, and Nigeria’s has risen 47%. The strong performance is helping frontier markets—usually defined as countries that have a stock exchange but don’t meet the size and liquidity requirements to be in the emerging-markets index—to gain more acceptance in the investment community.

Data from EPFR Global show that funds focused on frontier markets saw inflows of more than $1.5 billion in the first four months of this year. Since the start of 2013, the funds have attracted $5.6 billion.

There may be more good news: New research shows that frontier markets, often tagged as risky and unstable because of political and economic factors, may be less volatile than commonly assumed.

A previously unpublished study by the New York-based fund manager LR Global, released by the firm in late May to selected clients, looked at the weekly returns, in U.S. dollars, of 80 stock-exchange indexes across developed, emerging and frontier markets in the 10 years to the end of 2013.

The research showed that frontier markets’ stock indexes were significantly less volatile than emerging markets and slightly less bumpy than even developed markets.

LR Global, which has $200 million under management invested in frontier markets, defined volatility as the annualized standard deviation of stock-market returns. Standard deviation, which LR Global measured on a weekly basis, is a measure of how much the market swings up or down. The higher the standard deviation, the more volatile the market.

Brent Clayton, a portfolio manager at LR Global and one of the report’s co-authors, acknowledged that he was surprised by the results. “We had an inkling from looking at the indices that frontier markets would be less volatile than emerging markets, but we were shocked to find that not only was that clearly the case, but also they were less volatile than developed markets over most periods.”

Mr. Clayton attributes frontier markets’ low volatility partly to their limited exposure to the global financial system. In a panic-driven flight to safety, investors tend to bail out of emerging markets. Frontier markets, because they have seen lower inflows of foreign capital, have generally been less affected by such moves.

“These are markets that are primarily driven by local investors and avoid the whims of shorter-term-driven foreign capital flows,” Mr. Clayton said.

Not surprisingly, Ukraine is one of four frontier countries among the 10 most volatile markets in the world. The other three are Romania, Argentina and Kazakhstan. Five of the top 10 were emerging markets and the most volatile country of all was Iceland, a developed market that suffered especially badly during and after the financial crisis.

The least volatile of the 80 markets in the study was Trinidad and Tobago, one of nine frontier markets in the top-10 least volatile. The U.S. came in at No. 11 in the least-volatile ranking.

Nikhil Bhatnagar, a vice president at frontier- and emerging-markets brokerage Auerbach Grayson & Co., said that as frontier markets continue to attract new foreign investment, particularly through index-tracking funds such as exchange-traded funds, it is likely that volatility will increase.

A rise in volatility may not be a bad thing, though. Hedge funds, particularly, look for opportunities in times of extreme market movements.

As Vietnam’s stock markets plunged by 15% between early April and mid-May this year, for example, foreign fund managers were buying what they viewed as undervalued stocks. “We’ve been buying into the weakness,” said Asha Mehta, portfolio manager of Acadian Asset Management LLC’s $320 million frontier markets fund.

In Vietnam’s case, it is local investors, alarmed by their country’s deepening rift with China, who are dumping shares in local companies.

Rod Berens, co-chief investment officer of New York-based fund manager Berens Capital Management LLC, which manages $1.3 billion with a primary focus on frontier and emerging markets, believes such moves present great opportunities: “Frontier serves up cheap to very cheap stocks when participants are experiencing the pain of underperformance,” he notes.

http://blogs.wsj.com/frontiers/2014/06/01/frontier/