During my recent journey throughout Asia, it was clear that in some countries there were many more motorcycles than cars on the road. This seems a better indicator to me than the rule of thumb that any country without a McDonald's (MCD) is a "frontier market".
Frontier markets offer investors a combination of great value, huge upside and unique challenges. As giants like China run into growing pains, higher costs and negative returns, frontier markets are up - propelled by more political stability plus easy access to modern communications, technology and capital.
The case for investing in frontier markets is simple and powerful - the world is filling in and these countries are catching up fast. Frontier countries are far behind developed countries like Japan and America and even playing catch up with countries like Thailand, South Korea and China. Imagine a chance to invest right now in the China of 1980 when its wages were at rock bottom levels and it exported in a year what it now does every day.
Youthful populations and the move of workers from rural areas to higher income jobs in the cities are supercharging growth in these economies. The median age of many of these countries is at the demographic sweet spot of 25 years compared to 35 years in China and South Korea, and 45 years in Germany and Japan.
This explains all the small kids hanging on to their parents on motorbikes and the optimism driving family purchases of new houses, new washing machines, new refrigerators, new cars and better food and medical care.
This, in turn, explains why big companies from Japan, China, America, Europe and South Korea are falling over each to invest in frontier Asia. And it's not just lucrative new consumer markets and rising tourism that's driving this wall of capital but the need to access the region's ample natural resources.
The evidence of this optimism and virtuous cycle of growth is everywhere. Since 2009 and the cooling of its civil war, Sri Lanka's GDP has surged 40% and is now double that of India on a per capita basis. The 12th largest shopping mall in the world is in Dhaka, Bangladesh and a $20 billion energy investment by Exxon Mobil (XOM) in Papua New Guinea has the potential to double the size of its economy.
This may surprise you. Having a slice of frontier Asia in your portfolio actually reduces risk and volatility. Why? Because these markets beat to their own drummer rather than just going up and down with world stock markets like most asset classes.
But like maneuvering a motorbike in and out of chaotic traffic, investing in these frontier markets requires experienced and steady hands. You need to act on the best on-the-ground intelligence and keep a close eye on both politicians and tycoons.
You might consider the Asia Frontier Fund http://www.asiafrontiercapital.com/ that invests in publicly traded companies with performance right near the top of all frontier market managers.
I like this fund for a number of reasons. First, 46% of its portfolio in consumer stocks aiming to capture the young and rising consumer class. Second, I agree with the fund's 20% top weighting to Vietnam and the intelligent strategy of investing in each country's strengths such as tourism in Sri Lanka, mining in Mongolia, food companies in Vietnam and textiles in Bangladesh. Here's the kicker, many of the companies in the portfolio have significantly lower valuations compared to similar emerging and western companies making them attractive acquisition targets.
As a bonus, the portfolio sports a nice 4.4% dividend yield to cushion risk.
Here are three picks that Asia Frontier Capital CEO and portfolio manager Thomas Hugger likes right now.
Vietnam Sun Corporation (VNS) weaves in and out of motorcycles as the leading taxi operator in Ho Chi Minh City with a fleet size of close to 4,000 taxis. The company also has operations in other cities such as Binh Duong, Dong Nai and Da Nang. The company will increase fleet size in Ho Chi Minh City and also expand into new markets such as Hanoi. VNS is a good growth story at a reasonable valuation trading at less than 10 times 2013 earnings with expected net profit growth of 53% in 2013 and 29% in 2014.
Mongolians love their vodka and Mongolia APU is the leading beverage player in Mongolia with a diverse product range which includes beers, spirits, mineral water, juices and milk. APU has a 50% plus share of the Mongolian beer and vodka market and 20% of the water/juices market. The stock is trading at 12 times earnings and its pricing power makes it solid core holding.
As incomes rise in frontier markets, after more and better food, medicine is right at the top of shopping lists. Bangladesh's Beximco Pharma (BXP) is a leading pharmaceutical manufacturer focusing on generic drugs. Its manufacturing facilities in Bangladesh have been certified by regulatory bodies of Australia, EU, Middle East nations and Brazil. The company gained approval to start exporting its products to Europe and Australia and expects U.S. FDA approval by the end of the year. For a pharmaceutical/healthcare company its stock is valued very attractively at 4.5x 2013 earnings considering double-digit revenue growth.
Frontier Asian markets are on the move. Get onboard for a piece of the action.