Update Frontier Markets May 2022
The Frontier Markets index had a bad month in May, dropping 7.97%. The TCM Frontier funds managed to keep the declines relatively limited, but historically it was still a significant drop. Sentiment is negative, as developing countries are seen as above average vulnerable to rising food and energy prices. The related rise in inflation and interest rates also means higher financing costs.
The exposure to Pakistan and Egypt caused the most price pressure in the past month. For example, the Egypt Stock Exchange (EGX30 Index) fell by more than 10% measured in euro. The country is one of the largest importers of wheat and supply is under pressure due to the war in Ukraine. Fortunately, the government has found alternatives in India, among others, so that the stock seems to be sufficient for the rest of the year.
If we look at the current relative valuations, we see that the price earnings ratio (P/E) of Frontier Markets (FM) is trading at a discount of 37% compared to the World index (source: Factsheet MSCI 31 May 2022). It is true that these markets often have some discount because of liquidity, but compared to its own 5-year history, the FM index is trading also with a discount of more than 20%. So these countries have already priced in a significant bad scenario.
Within the portfolio, the average P/E is still lower than the index at 10.1. All 70 companies in the selection (except 1) are profitable both this year and next year based on consensus expectations. Some companies are perfectly capable of passing on higher input prices. For example, Nigeria Breweries caught the eye. The company reported its best first-quarter earnings growth in 18 years. The impressive performance was due to increased production volume combined with price increases implemented in mid-2021. Revenue estimates for the next 5 years have been revised upwards to +12.6% on average per year compared to 2.6% previously.
During the month we added to Guaranty Trust bank in Nigeria. This stock appears to be priced for “disaster” at a P/E of just 3.5x with a dividend yield of 13.6%. This while the company has shown higher net profit and earnings per share for ten years in a row through all crises. For 2023 and 2024, the consensus EPS growth is 17% per year. Nigeria is getting a little more air economically due to the rising in oil prices. And with the upcoming elections (Feb ’23) chances are increasing for much-needed reforms that can give a positive boost to stock market sentiment.
Finally, we also added to the position in Square Pharmaceutical in Bangladesh. The company is a market leader in the country with a population of 165 million inhabitants and also exports to 36 countries. Both turnover and net profit have shown an increase for 12 years in a row. The dividend grew 16.4% over the past 5 years and the stock is now trading at 10.4x earnings.
