FRONTIERS-Asia’s frontier markets lucrative but size a worry

(Reuters journalists have produced a special multimedia
package on frontier markets including stories, video reports,
pictures, research and graphics. To see the full package click

* Frontiers make up four of Asia’s 5 top performing markets

* Liquidity, lack of research a worry

* Better returns seen in emerging markets

* Frontiers in Africa, Middle East seen cheaper than Asia

By Kevin Plumberg, Asia Asset Allocation Correspondent

HONG KONG, May 26 (BestGrowthStock) – Two years ago during the last
bull market, Teera Chanpongsang, a fund manager at Fidelity
International, hit the streets of Bangladesh, Pakistan and
Vietnam, hoping to find opportunities in frontier markets.

He went back to his office in London and told a client keen
to invest in Vietnam that he didn’t find any good deals.

Another bull market arrived earlier this year in the
fastest growing region in the world, but this time too
Chanpongsang could not found any bargains on a frontier stock
for his $78 million portfolio of emerging Asian equities.
Vietnam and Sri Lanka figured in his search again.

“At this point I don’t see any opportunities in frontiers,
I see more opportunities in core emerging Asia,” said
Chanpongsang, who counts India, China and Indonesia as the
countries with the biggest representation in his fund.

Razor-thin liquidity, lack of research about the region’s
frontiers and high valuations will keep investors like
Chanpongsang slow to shift from the region’s fast-growing
emerging markets to the frontiers.

However, frontier markets’ low correlations with emerging
markets will make them attractive buys at the right price,
especially given the surge in volatility on fears Europe’s
sovereign debt crisis is worsening.


For a Reuters Insider interview with fund manager Mark
Mobius on frontier markets, click on

For a text version, click on [ID:nTOE63P07A]

For graphics on frontier markets, click on:

For a FACTBOX on political risks in Asia, click on:


Four of the five top performing Asian stock markets so far
this year are frontiers. Sri Lankan stocks (.CSE: ) are up more
than 20 percent in 2010 on relatively low volatility, and the
other top gainers are Bangladesh (.DSI: ), Pakistan (.KSE: ) and
Vietnam (.VNI: ).

Indonesia (.JKSE: ) is the only core emerging market among
the five top risers.

To some extent, there is some disagreement on which Asian
countries should be considered frontier, but the pool includes
Pakistan, Sri Lanka, Vietnam and Bangladesh. Depending on what
benchmark they use, fund managers often also include securities
from the Philippines and Kazakhstan.

The countries each have their own political and economic
risks and actually have little in common except for one thing:
their economic influence is small. The combined gross domestic
product of Bangladesh, Pakistan, Sri Lanka, Vietnam and
Kazakhstan is about the same as Indonesia, or 3.4 percent of
Asia’s total gross domestic product.

To provide a sense of scale, South Korea is 6 percent of
Asia’s combined GDP and China is 30 percent.


Last year, the end of Sri Lanka’s civil war after a quarter
century led retail investors and some foreigners to bet on
robust recovery, sending Colombo’s benchmark index up 125

Also, the compound annual growth rate seen for the next
five years for Vietnam and Bangladesh is similar to emerging
market titans China and India.

What is making foreign investors reluctant to dive in
though is simply how small the markets themselves are.

For example, in five years, average daily trading volume
has doubled in Sri Lanka to $5.2 million, World Federation of
Exchanges data showed. Yet, that is still less than 6 percent
of the daily average in the Philippines.

Sri Lanka’s market capitalisation is only 0.06 percent of
Asia-Pacific excluding Japan.

Patrick Ho, head of Asian ex-Japan equities with BNP
Paribas Investment Partners in Hong Kong, is looking for ways
to add Vietnamese stocks to his portfolios because of client

However, a dearth of market research in English and strict
trading rules make it difficult. For example, Vietnam requires
foreign investors to use a single domestic counterparty to
trade. That makes leakage of information a problem, if others
in the market try to front-run your trade.

“When you generate alpha and you want to get out, your sell
order may be known to the whole market. That’s a big issue for
us when we want to make a high-conviction trade,” said Ho, who
oversees around $9 billion in assets.

He said he may end up hiring a local fund manager in
Vietnam or buying some participation notes, which are sold by
brokerage firms and effectively allow foreigners to gain
exposure to domestic stocks without the regulatory hurdles.


Vietnam’s low correlations with other markets in the region
make it particularly attractive to BNP’s Ho.

On a 90-day rolling basis, correlations between benchmark
indexes in Pakistan, Sri Lanka and Vietnam and the MSCI
Emerging Asia index (.MIMS00000PUS: ) were 0.1 or lower. By
contrast, the correlation between Hong Kong stocks and the MSCI
index is 0.9.

Another factor making frontier market assets tricky is that
hedging instruments are not often available.

To reduce risks, Rajendra Nair, who manages a $20.7 million
Asian frontier fund for JPMorgan Asset Management, includes
stocks from companies listed in Australia, Canada and Hong Kong
that have significant exposure to frontier markets.

However, Andrea Nannini, who oversees a frontier fund for
Halbis, a part of HSBC Global Asset Management, in London does
not like to cut risks in this way because it could limit
potential upside in returns.

For Nannini, price is key.

“Asian frontier markets look very cheap relative to the
bigger Asian emerging markets like India and China but compared
to other frontier markets like Africa and Middle East, Asia is
a little expensive,” said Nannini, who oversees some $150
million in assets.

More than half of Nannini’s HSBC New Frontiers Fund is made
up of stocks from the Middle East and Africa. Asia has the
smallest representation and makes up about 11 percent.

Equities in Sri Lanka are trading at 2.1 times book value,
the same as emerging market star Brazil, Thomson Reuters
Starmine data showed. Bangladesh is trading at 3.6 times, more
expensive than China and India.

Nannini believes Pakistan, unlike its Asia peers, is
trading cheaply and offers a good opportunity to diversify.

“Over time frontier markets will become more integrated
with global markets but that’s a process that will take many,
many years,” he said.

Stock Market Today

(Additional reporting by Parvathy Ullatil and Vikram Subhedar;
Editing by Raju Gopalakrishnan)

FRONTIERS-Asia’s frontier markets lucrative but size a worry