Since bottoming at the end of October, the MSCI Emerging Market Index (MXEA) and MSCI Asia Ex-Japan ...
Frontier Finds from Mongolia to Vietnam
10/31/2013 10:00 am EST
My case for frontier Asian markets is simple and powerful: Imagine a chance to invest right now in the China of 1980, when its wages were at rock bottom levels, and it exported in a year, what it now does every day, says Carl Delfeld of the Pacific Economic Club.
Frontier countries are far behind developed countries like Japan and America, and even playing catch up with countries like Thailand, South Korea, and China, but they are catching up fast.
Frontier markets offer investors a combination of value, huge upside, and unique challenges. As giants like China run into growing pains, higher costs, and negative returns, frontier markets are up—propelled by easy access to modern communications, technology, and capital.
Youthful populations, and the move of workers from rural areas to higher income jobs in the cities, are supercharging growth in these economies.
This, in turn, explains why big companies from Japan, China, America, Europe, and South Korea are falling over themselves and each other to invest in frontier Asia.
And it's not just lucrative new consumer markets and rising tourism that's driving this wave of capital, but the need to access the region's ample natural resources.
But like maneuvering a motorbike in and out of chaotic traffic, investing in these frontier markets requires experience and steady hands. You might consider the Asia Frontier Fund, which I like for a number of reasons.
First, 46% of its portfolio is in consumer stocks aiming to capture the young and rising consumer class.
Second, I agree with the fund's 20% top weighting to Vietnam, and the intelligent strategy of investing in each country's strengths, such as tourism in Sri Lanka, mining in Mongolia, food companies in Vietnam, and textiles in Bangladesh.
Here's the kicker: many of the companies in the portfolio have significantly lower valuations compared to similar emerging and western companies, making them attractive acquisition targets. As a bonus, the portfolio sports a nice 4.4% dividend yield to cushion risk.
Here are three picks that Asia Frontier Capital CEO and portfolio manager Thomas Hugger likes right now:
Vietnam Sun Corp. (VNS) (Ho Chi Minh stock exchange) is the leading taxi operator in Ho Chi Minh City with a fleet of close to 4,000. The company also has operations in other cities such as Binh Duong, Dong Nai, and Da Nang.
The company will increase fleet size in Ho Chi Minh City and also expand into new markets such as Hanoi. Vietnam Sun Corp. is a good growth story with a reasonable valuation, trading at less than ten times 2013 earnings, and expected net profit growth of 53% in 2013 and 29% in 2014.
Mongolians love their vodka and Mongolia APU (Mongolia stock exchange: APU) is the leading beverage player in that country, with a diverse product range that includes beer, spirits, mineral water, juices, and milk.
Mongolia APU has a 50% plus share of the Mongolian beer and vodka market and 20% of the water and juice market. The stock is trading at 12 times earnings and its pricing power makes it a solid core holding.
As incomes rise in frontier markets, after more and better food, medicine is right at the top of shopping lists. Bangladesh's Beximco Pharma (SEA:BXP) is a leading pharmaceutical manufacturer focusing on generic drugs.
Its manufacturing facilities in Bangladesh have been certified by regulatory bodies of Australia, EU, Middle East nations, and Brazil. The company gained approval to start exporting its products to Europe and Australia and expects US FDA approval by the end of the year.
For a pharmaceutical/healthcare company, its stock is valued very attractively at 4.5 times 2013 earnings considering double-digit revenue growth.
Frontier Asian markets are on the move. Get onboard for a piece of the action, (but wear a helmet).
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