By Johannes Loefstrand, portfolio manager of the T. Rowe Price Frontier Markets Equity strategy
Most investors recognise the powerful long-term structural tailwinds underpinning frontier markets. Home to 16 of the 20 fastest-growing economies in the world over the past decade, frontier markets typically display sound fundamentals – often featuring youthful populations, low labour costs and modest debt burdens.
However, even though the early-stage economies within our frontier universe account for 36% of the world’s population and 15% of total GDP, these markets remain firmly out of the investor spotlight. In fact, just 0.3% of the total global equity market cap resides in frontier economies.
Interest in frontier is undeniably impacted by several sweeping assumptions, many of which are either erroneous or enormously exaggerated. Political and economic instability is often referenced, as many of the world’s most turbulent nations are housed within the frontier classification. However, while there will always be unstable outposts – as seen in Sri Lanka’s recent strife – the frontier universe is incredibly diverse, and investors are not forced to have exposure to any challenged countries.
While long-term frontier market performance has been robust – with comparable returns relative to more established equity markets – many investors simply assume the frontier universe behaves similarly to the commonly held emerging markets index. In reality, frontier performance displays a low correlation to both emerging and developed markets, largely due to reduced foreign investor activity, which global capital allocators tend to benefit from.
Another misconception surrounding frontier markets is liquidity. While frontier markets do tend to be less liquid than developed and emerging markets, liquidity conditions are continually improving across many frontier markets and it is far from problematic.
Visiting diverse and dynamic Vietnam
The frontier universe is incredibly diverse, with each country exhibiting unique opportunities and risks. This is why we are constantly on the road visiting these distinctive and dynamic economies, as we believe it is crucial to go into the field to dig deeper into company operations and speak face-to-face with management teams.
As such, we have just returned from a visit to Vietnam – the next frontier tiger economy likely to roar in the years ahead. Vietnam is a deep and liquid market, with about 1,700 listed companies. It also trades, on average, more than US$1bn per day – which is on par with more developed markets, such as Mexico.
We have been optimistic about this dynamic economy for some time, which is why our T. Rowe Price Frontier Markets Equity strategy has a 40% position in Vietnam – by far our largest country overweight and highest among our peer group.
Vietnam has witnessed a strong increase in exports over the past decade, while productivity growth has also exceeded regional neighbours. With a young demographic, continuing urbanisation, and rising disposable incomes, Vietnam is fast becoming a classic consumer economy. In fact, at the turn of the millennium, there were only six million people classified as middle class and above in the country, but this is expected to rise to more than 75 million by 2030.
Capitalising on rising consumer class
One company likely to capitalise on the consumer boom is Mobile World, which has the potential to become the leading retailer in the country. As its name suggests, Mobile World is Vietnam’s dominant electronics retail business – but this is not the key driver of the company’s appeal.
The primary compelling characteristic of Mobile World is its exposure to grocery retail. Formal grocery retail remains underdeveloped in Vietnam, accounting for just 10% of the total market. This is far below most Asian peers, such as Malaysia and Thailand, which are upwards of 50%.
Mobile World expects its grocery division to break even by the end of the year, which we believe is achievable. It is also possible a strategic investor may come in to further reinforce the company’s grocery operation. Looking at the current market cap of the entire business, we do not believe the investment community is adequately pricing the powerful multi-year opportunity for Mobile World in grocery.
Another company set to enjoy Vietnam’s consumer expansion is PNJ, the country’s largest jewellery retailer. While the Vietnamese population has traditionally been a major purchaser of gold, rising middle-class wealth is accelerating demand for jewellery. Trust is the primary driver of PNJ’s success, as much of the current gold trade in the country remains incredibly informal.
Beneficiary of high education standards
In addition to the rising middle class, another key long-term tailwind for Vietnam is its standard of education, as the country boasts an above-OECD-average literacy rate, according to the OECD and World Bank. This is feeding through to higher-skilled jobs in specialised sectors and industries, for both men and women. It is clearly evident in the tech sector, with a strong proportion of skilled coders and programmers.
FPT, Vietnam’s leading IT company, greatly benefits from these strong foundations. FPT is unique in the world of IT outsourcing groups as it has its own university, where it educates its more than 70,000 students, primarily in software development.
With the ability to tailor its curriculum, FPT undertakes studies in Japanese language and culture. It has enabled the company to crack the Japanese market, which accounts for more than 40% of its IT services sales. This has been a notoriously difficult proposition for many global IT outsourcers. Cost advantages of roughly 15% relative to Indian peers have also been beneficial.
In a challenging global environment for IT services business, FPT still grew sales by 22% over the first six months of 2023. The company has compounded its share price by more than 30% a year in dollar terms over the past five years, and its share price still only trades at 14x 2024 consensus earnings.
Witnessing a decade of development
Vietnam is a totally different country today from when I first visited it a decade ago. GDP per capita has doubled over this period, while city skylines have changed, mobile phone penetration has rocketed, and the English language has become significantly more prevalent. It is reminiscent of a young Taiwan or South Korea – but with better food! On the investment side, governance and investor relations have improved dramatically.
It has not been smooth sailing for the economy over recent years, however. While the Vietnamese government made positive steps in clamping down on corruption last year, an unintended consequence of the probe was a puncturing of the local real estate market. Coupled with a reduction in exports due to the global economic slowdown, GDP growth of just 3.3% was recorded in the first quarter – the worst figure for a decade.
However, after our recent visit to the country, we are increasingly confident that Vietnam has passed the worst of the current slowdown, particularly as the government has announced a number of measures to stimulate the economy over the near term. Importantly, the long-term structural narrative remains intact, as Vietnam continues to tell a convincing FDI-led story, with large corporates diversifying away from concentrated manufacturing bases in China or Taiwan.
The Vietnam Ho Chi Minh Index currently trades at less than 12x one-year forward earnings, versus a historical average of about 14x. We believe this is an incredibly compelling opportunity to have exposure to this market, especially as we expect its ascension to the MSCI Emerging Markets Index over the next three years – which will significantly raise the profile of the country’s leading businesses.