Update June 2022

Published on july 12, 2022
Update June 2022

The Frontier Markets index fell 3.5% in June, with the TCM Frontier fund falling slightly less than the index. As in previous months, sentiment was dominated by global increases in food and energy prices. Inflation remains high and causes rising interest rates and increasing financing costs. Future rate hikes are likely to curb inflation, reducing pressure on weaker currencies.

Under these circumstances, Frontier Markets have an edge, especially when compared to developing markets. Although a further rise in inflation and increasing interest rates is certainly something to monitor, it is not an immediate cause for concern. In fact, Frontier Markets are more resilient to rising prices compared to developed markets.

Research shows that inflation affects the markets more negatively in the short term than in the long term and in particular has a more severe impact on growth stocks than on value stocks. Since interest rates are usually raised to keep high inflation under control, the result is that growth stocks are more negatively affected compared to value stocks in times of high inflation. After all, the rising interest costs are discounted in the future cash flows on which the valuations are based. About half of developed markets are growth stocks, with this percentage being even higher at 65% for Emerging Markets.
This is in contrast to Frontier Markets where the growth stock component is low. This could explain why Frontier Markets stocks, mostly made up of value stocks, have a positive correlation with inflation, especially in the long run.

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 34% compared to the World index (source: Factsheet MSCI June 30, 2022). It is true that these markets always quote with some discount because of liquidity, but also compared to its own 5-year history, the FM index is trading with a discount of more than 20%. So these countries have already priced in a significant bad scenario.

Finally, within the selection of Frontier Markets, the price pressure in Vietnam was very high in June, with the Ho Chi Minh index falling -5.4% and the Hanoi index -10.2%. The TCM Vietnam fund also fell -4.4%, but less than the stocks markets. Sentiment was mainly under pressure due to factors such as inflation and interest rate hikes, but also because of the strict COVID-19 rules in China and a decrease in liquidity. Although sufficient uncertainties remain for the coming months, there are also positive points to be noted. For example, the growth of the industries affected by the pandemic is expected to accelerate in the second half of 2022. It is also assumed that the disbursement of Vietnamese government investments will increase significantly. In addition, the government support package of 2 percent interest for companies provides more potential for stock market growth, and economic growth in general, if implemented as planned.

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