Oil falls, which Frontier Markets benefit?

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Oil falls, which Frontier Markets benefit?

This is the topic of the day.  So why wouldn’t we chime in?  Of course, we will be looking at it exclusively from the lens of Frontier Markets, and we have been very surprised at the dearth of data.  We do not feel that the analysis to date has been terribly useful.

Oil has fallen, enough so that the dynamics of Frontier Markets have changed.  We believe that Frontier Markets by and large have reacted opposite to what a cool-headed assessment of the situation would suggest.  Check out our dashboard for the week, if you don’t believe us.  Why should Oman fall 15% in one week?  Yes, the economy is certainly reliant on oil, but it avoids the fundamental value of the companies listed in Muscat.  We do believe the reaction towards oil companies is overdone.  This is the time when investors should be buying stocks in the energy sector.   In USD terms, Frontier Markets are negative again in 2014, returning -2.6% YTD.  That is an awful return for markets with so much promise.  Certainly there are bright spots; Egypt, Bangladesh, Nepal, Pakistan, Sri Lanka, and the Philippines to name a few.

We decided to do a simple analysis which looks at which economies are likely to be the biggest beneficiaries of the fall in oil prices.  The table at the bottom of this article provides you with a list of countries ranked by their energy import spending, as a % of GDP at $100, as well as at $60.  The idea being, that those countries that have the largest portion of GDP spent on petroleum based products, will also be the largest beneficiaries of the price fall.  Those countries at the bottom are more interesting.  The list include countries that are oil producers, but it also includes countries that simply do not spend a lot on oil; either because the country is poor or it lacks infrastructure for energy to be heavily consumed.

The Top 20 Frontier Markets’ countries should come as no surprise and are listed in the table below.

Country% of GDP spent on oil at $60 Brent% of GDP spent on oil at $100 Brent
Bahrain15.4%25.6%
Jamaica13.4%22.3%
Lithuania9.5%15.8%
Bulgaria8.7%14.4%
Jordan7.9%13.2%
Cote D'Ivoire7.6%13.2%
Kyrgyzstan5.4%9.0%
Cambodia5.2%8.6%
Cyprus5.1%8.5%
Morocco5.0%8.4%
Palestine5.0%8.3%
Macedonia4.9%8.2%
Bosnia and Herzegovina4.8%8.1%
Malta4.6%7.7%
Kenya4.3%7.2%
Cameroon3.9%6.5%
Tunisia3.8%6.3%
Ukraine3.8%6.3%
Ghana3.7%6.2%
Pakistan3.5%5.9%

Frontier Markets most sensitive to oil price

The Bottom 20 Frontier Markets’ are shown in the table below.

Country% of GDP spent on oil at $60 Brent$ of GDP spent on oil at $100 Brent
Colombia0.0%0.1%
Argentina0.1%0.1%
Saudi Arabia0.3%0.4%
Gabon0.4%0.7%
Laos0.4%0.7%
Oman0.8%1.3%
Peru0.9%1.6%
Kazakhstan1.0%1.7%
Uganda1.4%2.3%
Bolivia1.4%2.3%
Egypt1.5%2.5%
DRC1.5%2.5%
Serbia1.6%2.6%
Nigeria1.6%2.6%
Rwanda1.6%2.6%
Nepal1.7%2.8%
Zambia1.8%3.0%
Indonesia1.9%3.2%
Bangladesh2.0%3.3%
Paraguay2.0%3.4%

Frontier markets least likely to benefit from fall in oil prices

A fall in oil prices tends to boost consumer spending and thus discretionary consumer goods in Frontier Markets should increase.  The primary reason for this, is that those who are most affected by oil price shifts are the wealthy in Frontier Markets, because they already own a vehicle or other motorized transportation.

We encourage investing over the long-term which benefits from steep falls in commodity prices such as this.  Another attractive area is solar companies which have been hit hard by the fall in oil prices, as investors assume that solar is less compelling when oil is cheap.  However, it is always prudent to supplant a long-term investment strategy with opportunistic short-term investing.  Along these lines, looking at consumer discretionary names in Frontier Markets makes a lot of sense.

As always, if you have any questions, please let us know.

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