Frontier Markets Require an Active Look

By Sergey Dubin, CFA, Analyst and Portfolio Manager | July 30, 2024

At Harding Loevner, we focus on building portfolios from the bottom up, guided by our quality-growth philosophy, and rarely comment on actions of other investors or index providers. But sometimes it’s necessary to do so to highlight meaningful developments affecting the frontier emerging markets (FEM) asset class.

In June, asset manager BlackRock announced its intention to liquidate its Frontier & Select EM ETF, which once had assets exceeding US$400 million. The company cited currency liquidity challenges in several smaller frontier markets as the main reason for its decision.

BlackRock’s decision to close its passive FEM fund underscores our long-held belief that the idiosyncratic nature of frontier and small emerging markets, as well as their volatility and liquidity characteristics, make them much better suited for an active rather than passive investment strategy.

Markets such as Egypt and Nigeria have indeed faced challenges with repatriation due to unsustainable currency pegs, which both countries abandoned earlier this year. Since then, Nigeria was eliminated from the benchmark by index provider MSCI in February. Also, Egypt has attracted US$35 billion from a consortium led by Abu Dhabi’s ADQ investment company and an additional US$5 billion from the IMF, easing liquidity pressure there.

We also note that BlackRock shuttered its fund as the FEM Index has actually become more balanced. From 2023 through the first half of 2024, MSCI added about 125 stocks to the MSCI FEM Index, resulting in lower country concentration for the benchmark. The Philippines, once the largest market with more than 30% weight, is now 20%.

In fact, the MSCI FEM Index is now more diversified than the MSCI EM Index. The five largest markets in FEM—the Philippines, Vietnam, Peru, Romania, and Morocco—constitute less than two-thirds of the index weight while the five largest markets in EM—China, India, Taiwan, South Korea, and Brazil—account for more than three-quarters of the index weight. Not only is the FEM Index more diversified, the exposure that investors can achieve is markedly different than the MSCI EM Index.

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Ramadan’s Shifting Dates Have Complex Effects on Businesses

March 07, 2024

The holy month of Ramadan affects companies and products differently each year, and it is essential for investors in Muslim-majority countries to understand these effects. The holiday, during which Muslims fast from dawn to dusk, starts 10-12 days earlier each year, unlike fixed holidays such as Christmas. This year, Ramadan starts at sunset on March 10 and lasts until April 9.

Ramadan’s Slowly Shifting Seasonality

Timing of Ramadan relative to Northern Hemisphere seasons, 2010-2040

The fact that the holy month moves each year means that the effects of Ramadan on businesses change over time. Recently, when Ramadan was during the summer, it was a significant headwind for companies such as brewers, as the fast suppressed demand for beer during what would otherwise be a peak month. But now as Ramadan is moving earlier in the year, that headwind will lessen.

Learn more about Ramadan’s effect on businesses in Muslim-majority countries, or those with significant Muslim populations, in our extended analysis.

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The Democratic Republic of The Congo Could Be the Next Big Frontier Market, Eventually

By Babatunde Ojo, CFA, Analyst and Portfolio Manager | November 01, 2023

The Democratic Republic of the Congo, which has abundant natural resources, rich farmland, and the powerful Congo River, has the potential to become the renewable-energy hub for the entire world and Africa’s breadbasket. I toured Kenya and the DRC in July on a trip organized by Nairobi-based Equity Bank, which operates a subsidiary in the DRC. As an analyst of frontier-market companies, what I saw intrigued me. The DRC is a nation with vast potential, as well as significant hurdles to overcome.

The possibilities are mind-blowing. The DRC, with a population of 112 million and situated almost precisely in the middle of the continent, is the second-largest country in Africa by landmass and the 11th largest in the world. The Congo River, which winds through the country and is the second largest in the world by discharge volume, has the potential to produce 100 gigawatts of clean electricity, of which less than 3% is currently being harnessed.

With the river and its tributaries coursing through the countryside, the DRC has an estimated 80 million hectares of arable land, enough to produce food for two billion people. The DRC also has abundant mineral resources. A recent UN study estimated its untapped mineral reserves were worth US$24 trillion. The DRC holds 46% of the world’s cobalt reserves, 23% of the world’s lithium reserves, and 4% of the world’s copper reserves. These are all commodities essential in the effort to enable the global transition to green energy.

Portfolio Manager and Analyst Babatunde Ojo, CFA, at a Somika mine in Lubumbashi Katanga, Democratic Republic of the Congo.

That potential is attracting companies like Equity Bank, the largest bank in Kenya. The company has acquired two DRC-based banks in recent years, which now comprise 30% of its total assets. Equity Bank is early to the DRC, but we expect to see more investments flow to the country in the coming years. It is barely scratching the surface of what it could become.

Decades of autocratic rule and corruption have kept the country from tapping its potential. Beginning with Mobutu Sese Seko in 1965, the DRC was marred by wars and political instability under a series of dictators. Because of that, the country’s economic development has been weak, even by African standards. Ranked by GDP per capita, it is one of the poorest nations in the world. The entire country produces only about 3,000 megawatts of power, leading to constant shortages. Less than 10% of the country’s arable land is currently being farmed, making the country dependent on others for food. Only 6% of the population have bank accounts.

The DRC’s financial infrastructure is bare bones. Equity Bank’s DRC-based subsidiary, Equity Banque Commerciale du Congo (BCDC), is the largest bank in the country in terms of bank accounts but has only 1.9 million clients. And the DRC effectively has no capital market; there aren’t markets for government or corporate equities or bonds, which results in a low savings rate, deters economic growth, and makes the economy less efficient.

The physical infrastructure isn’t much further along. Simply generating power is a challenge; energy shortages are regular and severe. Somika, a mining company in Lubumbashi, the DRC’s second-largest city, provides its own electricity with diesel-powered generators, making energy and logistics the areas of some of its biggest challenges and costs. The result is that, despite having some of the highest grades of copper and cobalt in the world, local mines are not cost-competitive compared to mines in Australia.

Today, the DRC is addressing those and other issues. There’s been political stability since the 2018 election of current President Felix Tshisekedi. Working with developmental partners such as the United Nations, the World Bank, and the International Monetary Fund, his government enacted key political, judicial, and economic reforms that are beginning to unlock the country’s potential. Tshisekedi has attempted to weed out corruption and bring transparency to the government and the markets; these efforts resulted in a US$750 million World Bank financing package in 2022. His administration has proposed nearly 70 reforms focused on boosting business creation, facilitating property transfers, improving international trade, and more. The DRC’s entry into the East African Community trade bloc, also in 2022, opened access to neighboring markets with a combined 300 million residents and a combined GDP of US$285 billion.

Today, the DRC is Africa’s third-fastest-growing economy. Add its vast natural potential to that fact and you can see why companies like Equity Bank are moving there. That makes it enticing for forward-thinking investors.

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Vietnam’s Labor Costs, Taxes Attract Chinese Manufacturers

By Wenting Shen, CFA, Analyst and Portfolio Manager and Apurva Schwartz, Portfolio Specialist | June 13, 2023

Portfolio Manager Wenting Shen, CFA, and Portfolio Specialist Apurva Schwartz discuss why Chinese companies are relocating production facilities to Southeast Asia. Watch the rest of their conversation.

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Out of Our Minds

Frontier Markets Require an Active Look

Ramadan’s Shifting Dates Have Complex Effects on Businesses

Ramadan’s Slowly Shifting Seasonality

Timing of Ramadan relative to Northern Hemisphere seasons, 2010-2040

The Democratic Republic of The Congo Could Be the Next Big Frontier Market, Eventually

Portfolio Manager and Analyst Babatunde Ojo, CFA, at a Somika mine in Lubumbashi Katanga, Democratic Republic of the Congo.

Vietnam’s Labor Costs, Taxes Attract Chinese Manufacturers

Disclosures