Emma Wall: Hello and welcome to the Morningstar series, 'Why should I invest with you?' I'm Emma Wall and here with me today is Michael Levy, manager of the Baring Frontier Markets Fund.
Hello Michael.
Michael Levy: Good morning.
Wall: So, we're here today to talk about frontier markets. Emerging markets, their sort of elder brothers, have done very well this year, outperforming developed markets. Is this the case with frontier markets as well?
Levy: Yes, frontier markets had another strong year year-to-date. They're up over 15% in U.S. dollar terms and this is on a back of a very strong 2013 when frontier markets were up 20%. We believe more and more investors are seeing the appeal of frontier markets as frontier markets offer investors very strong growth opportunities, underpinned by strong demographics, under-penetration of consumer goods, service and products and a resource opportunity both in the physical resources and the human capital resources. So, frontier markets have very strong growth opportunities going forwards and we think that's why frontier markets continue to outperform both emerging markets and developed market peers.
Wall: This seems to be quite contrarian to what's going on in the news with the geopolitical backdrop. I mean, even today program is continuing on to the fact that markets just don't seem to be reacting to all this sort of the noise and the crisis that are going on in those regions. Is that sustainable or does there comes a tipping point where actually these things do affect the markets?
Levy: Well, I think political risk is actually having an impact on markets, both in emerging and developed markets. Russia is a very good example of emerging markets where political risk has had an impact and the equity markets have fallen.
In frontier markets political risk has also been discounted to a certain extent. So, recent problems in Pakistan have seen a near term correction in the market. We saw the issues in Argentina as well, partly political and partly economic, that had a small negative impact on the markets.
But I think investors generally see political risk as one of the risks when investing in frontier markets. There clearly are other risks. But again, investors are very keen on the growth opportunities in frontier markets and are prepared to look at some of the political risk given the opportunity.
Additionally, valuations in frontier markets aren't particularly stretched. Look at the aggregate valuation for 2015 and frontier markets are trading at about 9.5 times P/E which is very reasonable. So, it's fair to say that political risk is there. It always will be there in frontier markets, but it's something we have to manage as investors.
Wall: I think one of the other risks is perhaps the perception of lack of diversification within these regions. I know the Middle East takes up about a third of your portfolio, but perhaps for the uninitiated they might just think that was a pure oil play. Is that the case?
Levy: No, absolutely not. Frontier markets are characterised by global opportunity set. In Asia we have markets like Vietnam and Pakistan, in the Middle East markets like Saudi Arabia we're opening up and they really aren't just an oil play.
In fact, if we take Saudi Arabia as an example, healthcare opportunities are abundant and we have invested in companies operating in the healthcare sector. They are really benefiting from a structural shift in that sector in which provision of healthcare shifting from the public sector to the private sector. In Saudi Arabia as well you also have very strong consumer opportunities.
In the next five years we expect two million Saudi nationals to enter the workforce and this includes a huge increase in female participation and that gives consumer companies an immense opportunity as disposable incomes are rising in that region.
Wall: Michael, thank you very much.
Levy: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
