Are Frontier Markets Expensive?


Frontier Markets have been beaten and rendered unconscious only to regain consciousness and be punched in the jaw.  It has not been a good time for Frontier Markets.  The oil fall should be helping these economies more than it has, but that has not been reflected in equity market performance, and particularly in USD terms with the USD continuing to appreciate over a basket of currencies.  The DXY index (a representative basket of world currencies vs. USD) is up 5.2% YTD and is the strongest it has been since 2003.

In these heady days for USD, why bother investing elsewhere?  Certainly if you are a developed fixed income investor, it is almost a foolish proposition to put money anywhere but the US with low to negative real yields across the rest of the developed world.

What we would like to answer in this post, is whether or not Frontier Markets today look expensive.  The caveat, and it is a big one, is that we are doing this on a trailing P/E basis and a trailing ROE basis.  We are also restricting this to 30 countries in our Frontier Markets universe where we have access to data.  Certainly a forward P/E and ROE measure are more useful, but we do not think a trailing P/E is useless.

We are approaching this in a bit of a unique way.  We recognize that different markets trade in different ranges, so we will be evaluating Frontier Market valuations based on the world market, but also relative to the historical range of P/E and ROE in each respective country.  We have not found similar analysis on the internet, so we do hope you find it useful.

The table below provides the trailing P/E and ROE for each market.  We have also given some other major markets for reference.  The percentile column provides where the current P/E and ROE for that market falls within its historical range (1st percentile being the lowest P/E and the highest ROE)

You can see that a country like Mauritius is clearly expensive, trading at the top of its range at a relatively high P/E of 25.7 and a low ROE of 3.5%.  However, a country like Zambia, despite trading at the top end of its P/E range, is still incredible value, given that the top of its range is 4.7.  Also worth noting is that for Zambia specifically, the data only goes back to 2011.  Estonia, Egypt, and Qatar look expensive and overbought by the same measures.  Whereas, Jordan, Kuwait, Slovenia, and Ghana all look to be quite attractive.  What is worth nothing is that in other major markets, the US still seems reasonably priced, whereas India and Mexico are dangerously expensive.

There are other items to glean from this table as well.  Pakistan may be expensive relative to its historical range, but its P/E is still only 12 and the market offers an extremely attractive 18.6% return on equity.  What this demonstrates is despite the several strong years of returns for Pakistan, companies are not only still attractively valued, but comparatively cheap.  How can this be?  Pakistani, publicly-listed companies, unlike the country’s economy has been able to thrive in instability and profit margins and top-line revenue continue to outpace overall growth.  A similar story can be seen in Botswana.

There are other ways to visualize this data, and one of the things that we love to use are quartile charts.  They tell a wonderful story.  Below are a few examples of these charts, we have them for all markets, but it isn’t practical to put them below.  If you are interested, by all means let us know and we would be happy to help you out.

FM Valuation - 2015-02-09 - Quartile Charts

As you may have expected, the answer to the subject’s question is, it depends.  Certain markets are expensive and frothy (Egypt, Qatar), but other markets ae extreme values.  Picking good companies in each market and then using a macroeconomic overlay that is informed by these types of metrics as well as outlooks on inflation, interest rates, economic growth, and political stability is the most prudent way to invest in the Frontier Markets that we know of.

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

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