Barings Frontier Markets Funds

Investment Update on the Barings Frontier Markets Fund Feb 2014
Recent Performance
2013 was a positive year for frontier markets, with the MSCI Frontier Markets index returning, in US dollar terms, 27.1% on a total return basis.* This performance was driven by a number of factors, with inflows into the asset class remaining strong, in contrast to the outflows witnessed in emerging markets. For the year to date, the index has risen 1.4% in US dollar terms on a total return basis, which compares to a fall of 8.3% for the MSCI Emerging Markets Index.*
In our view, investors are continuing to realise the appeal of frontier markets and the strong potential that they offer. This potential has two elements to it, the first being the long-term growth potential offered by such elements as strong demographic trends, large resource potential, and the scope for increased consumption of goods, products and services. The second element is one of valuation, since although the asset class enjoyed a good year in 2013, we believe that it is still attractive, especially given the return profiles of a number of companies within this arena.
Emerging markets are currently enduring increased volatility as a result of the Federal Reserve’s decision to ease back on the level of asset purchases, but frontier markets have escaped the turmoil to some degree, thanks to a low correlation (-0.21) relative to emerging markets. Diversification benefits are also available in frontier markets, which also, in our opinion, help to provide a degree of insulation.
Over the course of 2013, we saw strong performance from such markets as the United Arab Emirates (UAE), Qatar, Pakistan, Kenya, and Nigeria.
The UAE and Qatar benefited from positive economic fundamentals, which acted as a support for the financial and real estate sectors, which account for substantial parts of their respective investment universes. In addition, upheaval in other parts of the Middle East meant that these countries benefited from fund inflows as they were perceived as safe havens by investors.
In Kenya, the election of a business-friendly government was the immediate cause of a rise in the local stock market, as investor optimism regarding growth increased. We believe that Nigeria continues to offer medium-term growth opportunities, and investors responded to this despite some near-term headwinds such as presidential elections and a cautious central bank.
Other markets have been weaker however, including Tunisia, Jordan and Lebanon. Tunisia is in the process of transition to a more democratic government, while Jordan and Lebanon have been affected by the civil war in Syria. Meanwhile, the Ukraine has endured both economic and political problems, causing investors to remain cautious on the outlook for the country.
The Outlook from Here
There are several areas in frontier markets which, we think, will provide opportunities. One of these is in Nigerian banks, where we expect continued loan growth and improved cost controls in a market that has, in our opinion, significant room for growth. In addition, Nigeria is likely to revise its GDP methodology, which should result in a strong upward revision to the size of the national economy, highlighting it as one of the largest in Africa.
In Asia, we see broad potential for opportunities in Bangladesh, Pakistan and Vietnam. In Bangladesh, we are enthused by the potential of the pharmaceutical sector, which contains a number of strong companies. The industry has been encouraged by the government, and has expanded to a point where pharmaceutical export growth now exceeds export growth of ready-made garments.
Saudi Arabia offers, we believe, an opportunity in the Middle East. The government has sought to boost local employment for Saudi Arabian nationals, and we expect this to support the current positive trend in consumption.  
In our view, the performance of frontier markets in 2014 will continue to be driven by domestic rather than global, elements. However, the improved global outlook is still likely to be positive for frontier markets on a broader level. Growth opportunities are, we believe, still intact, and we continue to look for those companies with reasonable valuations that have the ability to generate strong growth and provide positive earnings surprises.
Michael Levy
Investment Manager, Baring Frontier Markets Fund
Baring Asset Management, London