2021 Frontier Markets Outlook

2020 was a challenging year but the “Sun Also Rises” and hope 2021 will be a great year for all of us. The FM investment thesis did not deliver well in the last few years but we believe that 2020 was a turnaround. Our investment strategy delivered well in terms of performance and our key target markets have shown strong resilience during difficult period. I wanted to share with you our attached investment outlook and the main points are highlighted below:

·         Fund positioning – Our GARP approach focusing on well-priced leaders in FM helped us in 2020 and we believe that it will deliver even more in 2021. Our portfolio has today a PE level of only 8.3x vs 13.3x for FM index and close to 20x for EM.

·         Investors allocation - EM & FM countries are today close to 50% of GDP but allocation to EM equities is only 7.3% of total vs a peak of 14%. EM AUM as % of global GDP is in fact below 1%. FM represents close to 20% of EM ex China in terms of GDP and allocations to our universe are at less than a third of peak levels. We believe that allocations will move up to both EM and FM in 2021.

·         (Post-) COVID-19 crisis – Our regions managed well through a very challenging period and have excelled in minimizing the health impact. In terms of deaths per capita, FM have managed to have so far less than 5% of the level of North America. The lower health impact has allowed these countries to minimize the economic impact. GDP growth was negative in 2020 but most of our focus countries will be back close to trend-line in 2021 and beyond. Moreover they have managed this without over extending their fiscal and monetary resources which should give them additional flexibility going forward.

·         Valuations – FM are trading at steep discounts vs both EM and S&P 500. Based on PE levels, FM are trading at close to 60% of the multiples in EM and 50% of the S&P 500.  

·         Currencies – FM currencies have shown relative resilience in 2020 but have room for recovery in the coming years.

·         Negative real yields – Interesting to see that negative real yields are now everywhere in the world including FM. Not good for bond investors but should help equity investors across the globe. FM countries have some of the biggest upside in terms of undervalued equity markets (e.g. Nigeria) and in terms of countries which may see a future decrease in interest rates (e.g. Egypt).

·         Inflation – Future inflation expectations are expected to be higher in the coming years vs the historical averages in developed markets. The trendline is different in FM/EM where inflation is expected to decrease in the coming years vs 10 year averages.

·         Commodities – Oil and copper prices are telling us that the world is moving to a phase of recovery and hope. The crisis may not be over and we may see the real impact in the coming years but it seems that global growth is moving back to higher levels especially helped by Emerging Markets.

·         Sector rotation – Earnings growth has been uneven across sectors and similarly valuations have re-adjusted and in some cases overshot. We expect to see a recovery in earnings growth across sectors and will continue to overweight telecom, diversified financials, consumer discretionary and real estate.