Frontier markets have been beaten down, only to regain consciousness and be punched in the face soon after. Falling oil prices should be helping these emerging economies, but that has not been reflected in the performance of the equity market.
This is particularly true in U.S. Dollar terms, as the currency continues to climb in value against a basket of currencies. The DXY index, a representative basket of world currencies vs. the dollar, is up more than 5.2% since the beginning of 2015 and has enjoyed the strongest performance since 2003.
With the USD’s rise showing no signs of slowing down, why should you bother investing anywhere else? If you are a fixed income investor, it seems almost foolish to put money anywhere except the United States due to low, or even negative yields across the rest of the developed world.
This is only at first sight, though. We would like to answer whether frontier markets today are overvalued, or not so much.
The major caveat is that we will be doing this on a trailing P/E basis and trailing ROE basis. We are also limited our analysis to just 30 frontier markets where we there is more access to data. A forward P/E and ROE measure might be better, but at the same time, a trailing P/E is not useless.
It must also be recognized by investors that different markets trade in different ranges. Therefore, we will be evaluating frontier markets based on the world market, but also relative to the historical range of ROE and P/E in each country.
The quartile charts below show the trailing P/E ratio and ROE for each frontier market. There are also some larger economies for comparison, such as China, India and the United States. The percentile column shows where the current data for that market falls within its historical range, with the 1st percentile being the lowest P/E ratio and the highest ROE.
Some Frontier Markets Doing Better Than Others
Countries such as Mauritius, trading at the top of its range at a P/E of 25.7 and a low ROE of 3.5%, are clearly expensive when compared to their peers. But Zambia, despite trading at the high end of its P/E range, is still an incredible value given that the top of its range is just 4.7.
It’s also worth pointing out that for Zambia specifically, the numbers only goes back four years. Estonia, Egypt, and Qatar seem expensive by the same measures. However, Sri Lanka, Kuwait, Slovenia, and Bangladesh all look to be quite attractive for investors.
Notice that among other major markets, China and Japan seem reasonably priced. In contrast, whereas Mexico and India are highly overvalued.
As you may have already guessed, the answer to the subject in the question is: it depends. “Frontier markets” can’t be lumped together into a single category and generalized.
By picking well-valued stocks with great fundamentals that are listed in a country with low interest rates, robust economic growth, and stable political and business environments, you can’t go wrong. This is true whether you’re investing in frontier markets, emerging markets, or developed economies.
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