Attention is increasingly turning to large fast growing economies like Pakistan, Vietnam, Iran, Egypt, Nigeria and Bangladesh. These countries have big populations, income levels typically in the range of USD 1,000 to USD 10,000 and are also enjoying strong long term economic growth which is fuelling the expansion of a new middle class.
As a result these places are also experiencing the rapid uptake of consumer goods but still have the potential for years of future growth thanks to large young populations with steadily increasing income levels. For example the car market in Vietnam is currently growing at an explosive 27 percent a year but still only about 1.6 percent of Vietnamese people own a car, which leaves room for a lot of potential customers.
Frontier markets like these represent the global growth drivers of the future but many investors are scared off because of concerns around governance and political risk, others see a lack of volume in frontier markets or the currency risk as too acute. Others however have seen a grand once in a lifetime opportunity, Tundra Fonder is a Swedish fund which has fully committed to frontier markets, I was lucky enough to talk with the firm’s joint founder, CEO and frontier market aficionado Mattias Martinsson about Tundra’s strategy.
The height of the 1998 Russia crisis proved a turning point for Mattias, he had gone from being a stock picking teenager to a role specialising in Russian equities. The sudden collapse of the Russian financial markets demonstrated the dangers of overconcentration, but it did not cool his passion for frontier markets, instead it led him to diversify into other countries and to eventually found Tundra Fonder in 2011.
This decision led him on an journey of discovery through Pakistan, Vietnam and other emerging economies where he became acquainted with a number of hidden corporate gems, firms which are well run, enjoying strong cash flows and steady growth but were overlooked because of their location.
Pakistan and Vietnam share certain characteristics – high population, a fairly low but growing per income per capita, rapid urbanisation, plus crucially a relatively large and liquid stock market, or at least compared to other emerging economies. Tundra spotted ample opportunities in sectors which should see rapid growth in the years to come, for example insurance (only a tiny proportion, less than 1% of the population in places like Pakistan have ever purchased insurance). pharmaceutical companies are another big draw, as the need for medicine is a priority even in downturns, all on the major proviso that these were well run established companies.
While mining and natural resource companies are plentiful in frontier markets, the fact that they are at the mercy of commodity swings and the price of their product is not in their control all means that Tundra steers clear of such stocks. Of course volatility is synonymous with such markets but Mattias takes a long term view that this is a twenty year play and while there will be shocks and downturns, in the long run many companies represented in their funds have a bright future.
Tundra Fonder now has several active funds covering multiple frontier markets, a Pan-African fund as well as funds purely focussed on Pakistan and Vietnam.
Tundra Fonder has also been a pioneer in environmental, social and governance (ESG) issues. Companies which follow good ESG practice help to protect the environment, treat staff in a fair way and are more likely to avoid getting caught up in corruption and fraud. By making ESG issues part of the investment process and pushing firms to implement these policies Tundra Fonder help improve company performance and make firms more competitive.
Tundra Fonder maintains a dialogue with the companies it invests in to ensure any breaches to ESG guidelines are dealt with promptly. Tundra also has an active research team based in target markets that follow frontier companies and their ESG activities.
Vietnam is one of the most exciting frontier markets, often viewed as a mini-China thanks to its proximity, similar political culture and its fast growing manufacturing sector. Unfortunately this means it is also facing environmental and social pressures in the same way China has, air and water quality has fallen, deforestration is a major problem, as is corruption and labour abuse.
While Vietnam might have a legal and regulatory framework in place it has been poorly implemented leading too multiple violations resulting in the issues listed above. These problems are common to many fast changing emerging economies. The hope is that social responsible funds like Tundra can push and encourage more companies to adopt best ESG practice which will help reduce damaging environmental and social impacts.
