Frontiers

Dan Keeler

Pakistan’s Supreme Court removed Prime Minister Nawaz Sharif from office following an investigation into allegations of corruption, plunging Pakistan into a new phase of political turmoil, Saeed Shah reports. The court disqualified Sharif on Friday for not being “honest”, a requirement for lawmakers under Pakistan’s constitution. The court also ordered a corruption trial against Sharif, whose family is accused of amassing wealth through corrupt means and purchasing expensive overseas properties with that money.

Sharif stepped down as prime minister immediately following the verdict.

Pakistan's former Prime Minister Nawaz Sharif. European Pressphoto Agency

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Hasnain Malik, global head of equities research at Exotix Capital, said the move wasn’t necessarily negative. “We do not view the prime minister and his family as central to the improvements in security nor to the implementation of key initiatives such as the China-Pakistan Economic Corridor,” he said. He also noted that the development signals to investors that governance standards in Pakistan are improving.

The South Asian country sorely needs a sentiment boost among investors for whom Pakistan has swiftly swung from a favorite market to a near-pariah. Asha Mehta, portfolio manager of Acadian’s frontier markets fund, told the Journal that her fund has been reducing its exposure to Pakistan as investors’ focus has switched from the potential benefits of the country’s recent upgrade by MSCI to emerging-market status to the economy’s fundamentals, which she said are deteriorating.

Pakistan’s fall from grace contrasts sharply with a general improving trend in investor sentiment toward frontier markets. Mehta, whose $800 million fund is up almost 20% year-to-date in absolute terms, says the upgrade theme is still generating interest, and flows into frontier assets have helped drive up prices. “The impact of that is it makes stock selection a bit more difficult,” she added.

For more on our interview with Asha Mehta, see below.

Among the characteristics that are attracting investors to frontier markets are deepening capital markets, high growth potential, lower debt, inefficient pricing and compelling, fund manager Ashmore’s Ted Smith wrote in a note extolling the virtues of including frontier markets in an emerging-markets portfolio. Noting that many emerging markets have already resolved many of the technical or structural problems they faced and attained more maturity from an investment perspective, Smith said companies in the frontiers stand to benefit as the structural issues are resolved in their own markets. Frontier markets “represent one of the most attractive opportunities for growth and diversification available in the current global environment,” he added.

Nigerian President Muhammadu Buhari’s health was in the spotlight again after a delegation of colleagues from his political party visited him in London, where he is staying for medical care. Wolfango Piccoli, co-president of risk consultancy Teneo, said the government appears to be trying to discredit widely-held perceptions that the president is incapacitated but that “the damage already appears to have been done, with Buhari being away from Nigeria twice now and both for prolonged periods.”

Nigeria’s market doesn’t seem to be concerned. Its performance since early March, when WSJ Frontiers first noted that sentiment toward the country was beginning to improve, has been remarkable. The Nigerian All Share index is up 50% from its low of 24,582 on March 6th. This week it tacked on another 8.4%, although a 1% skid on Friday ended a 16-day run of positive closes.

While Nigeria is enjoying a remarkable turnaround, it is just one of several frontier markets posting strong performance this year. Romania is up 17%, Argentina has gained 27%, Estonia has increased by 16%, Ghana has gained 34% and Kazakhstan is up more than 30% this year. The central Asian market, which had been enduring a years-long slump, began to rise strongly in January 2016 and has gained 120% since then.

Tanzania’s demand for $190 billion in taxes from gold-miner Acacia is hurting the country’s prospects for attracting investment, Rory Gallivan reports. The country’s authorities accused Acacia of understating its revenues and demanded $40 billion in unpaid taxes and $150 billion in interest and penalties. The tax demand dwarfs the company’s annual revenue of just over $1 billion, analysts at Shore Capital said, adding that copies of the reports on which the demand is based have yet to be shared with Acacia. The lack of transparency is “not conducive towards investment in the country” they added.

Jordan’s economic prospects are brightening slightly as the Middle Eastern nation emerges from a spell of declining growth and accelerating inflation, the IMF said this week. Growth, which slowed to 2% last year from 2.4%, is set to increase to 2.5% this year and inflation, which reached 4.6% earlier this year is expected to stabilize at around 2.5% by the end of 2017, the multilateral said. While the outlook remains “challenging” the country is benefitting from improved exports, tourism and remittances, but the labor market remains a problem with unemployment approaching 20%.

China Merchants Port Holdings is investing $1.12 billion for a majority stake and for exclusive rights to develop and operate Hambantota port on Sri Lanka’s southern coast, the Journal’s Saurabh Chaturvedi reports. The deal gives the Hong Kong-listed company rights to operate the strategically located port for 99 years. The Hambantota port lies along an important trade route linking Asia and Europe.

Moody’s said this week that Bulgaria’s banks are in a strong position, despite relatively high risks stemming from corporate lending and from non-performing loans. The banks have been notching up steady profit growth, which the ratings firm expects to continue, albeit at a slower pace. The banks are benefitting from “increased business opportunities and credit growth [that] will support both interest and non-interest income,” Constantinos Kypreos, a senior vice president at Moody’s said. They also benefit from stable funding and high liquidity, he said.

Argentina’s economy gained momentum in May, growing 3.3% from the same month a year ago, Taos Turner reports. It also grew 0.6% from the previous month, the national statistics agency said. Twelve out of 15 sectors measured by the government expanded in May with significant growth coming from agriculture, construction, retail, fishing, hotels, restaurants and transportation. “Going forward, we expect the cyclical economic recovery to strengthen and broaden with private consumption supported by rising real wages and public investment adding a significant impulse to growth,” Goldman Sachs said.

Venezuelan bond prices tumbled to their lowest levels of the year as default fears grew following US President Donald Trump’s threat to impose sanctions on the country, Carolyn Cui reports. State-owned oil producer Petróleos de Venezuela SA’s bonds due in November and the government’s bonds due in 2038 both fell heavily. A selloff in the country’s debt has accelerated since Trump’s statement a week ago, which followed a referendum by millions of Venezuelans that rejected President Nicolás Maduro’s plan to rewrite the country’s constitution.

Activists run during a demonstration in Caracas on July 27. Getty Images

The IMF added to the gloom, increasing its forecast for the decline in the country’s GDP to 12% from an earlier estimate of 7%, Kejal Vyas writes. This would be the second consecutive double-digit fall in economic growth for the troubled oil-exporting nation. “This political crisis poses significant downside risks for growth if it escalates further or remains unabated for a long period,” the IMF said, warning of soaring inflation, a collapsing local currency and the increased likelihood of a humanitarian crisis that may lead to a mass exodus of Venezuelans to neighboring countries.

WSJ Frontiers caught up with Asha Mehta, portfolio manager of Acadian’s $800 million frontier markets fund to hear her views on the prospects for key markets.

WSJ: How is sentiment toward the asset class now?

Mehta: There is a heavy focus on growth, and companies that have good growth prospects are being rewarded. Valuations are relatively high, which is a sign that investors are looking for growth opportunities not valuations. The prospect of more markets’ being upgraded by MSCI is attracting a lot of interest. Overall it’s been a good year—driven in part by flows.

WSJ: What are the prospects for Pakistan?

Mehta: Our view has deteriorated and we are reducing our exposure. We had significant weight going into the MSCI upgrade, which played out very well. In April, though, investors’ focus turned from the upgrade story to the fundamentals, which have been deteriorating. It’s possible Pakistan could follow the path taken by Qatar and the UAE in the wake of their MSCI upgrades to emerging status, where negative performance is quite sustained.

WSJ: What about Argentina?

Mehta: Argentina was up 40% in anticipation of positive news relating to its potential upgrade to emerging by MSCI. It’s come down 10% since the MSCI disappointment, but it’s still done well. The sell-down is creating an opportunity to buy into Argentina, but the return profile has already been so strong that valuations are expensive at this point.

WSJ: Nigeria has been a star performer since March. Are you buying?

Mehta: We’re investing opportunistically, but we remain underweight. Nigeria has done great this year—a lot driven by positive investor sentiment. The secular long-term case for Africa is strong and Nigeria is the most liquid African frontier market. Investors have been eager for green shoots—the improved liquidity profile has been the catalyst.

WSJ: Vietnam doesn’t seem to be in line for an MSCI upgrade anytime soon. Is that a concern for investors?

Mehta: The MSCI view is not the only driver for Vietnam. ASEAN funds have pretty strong investments in Vietnam and emerging-markets funds are already starting to invest there. Retail-investor sentiment is strong, too. It’s starting to look like an emerging market, which is part of the case for investing there. The market is expensive, but it’s very broad and the overall outlook is positive.

Quote of the Week

“Vietnam is starting to look like an emerging market, which is part of the case for investing there. The market is expensive, but it’s very broad and the overall outlook is positive.”

Asha Mehta, portfolio manager of Acadian’s frontier markets fund

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120%

The rise since January 2016 of Kazakhstan's stock exchange

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