Frontier markets at a time of high inflation

BlackRock

Frontier markets might appear vulnerable at a time of global economic tension. The reality is that some are thriving in spite of the difficult environment, says Emily Fletcher, Co-Manager of the BlackRock Frontiers Investment Trust plc (LON:BRFI)

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. 

Inflation is a global phenomenon, but there can be little doubt that it hits the poorest the hardest. Energy and food are often a greater share of household spending for lower income households. Against this backdrop, frontier markets would appear to be vulnerable. However, the picture is more nuanced than it first appears.

There is no doubt that smaller emerging markets such as Egypt that import significant amounts of their energy and food, or have high debt as global interest rates rise, or are embroiled in mounting geopolitical crises have some challenges ahead at this time of crisis. However, frontier markets are richly diverse and there are those that are surviving and even thriving in the current environment. For investors, it’s just a question of looking in the right place.

The developed world is seeing levels of inflation that are the highest since the 1970s. German wholesale energy prices are up 23% year-on-year, the biggest move since the data series began in 1968. The gloomiest predictions put UK inflation at over 20%1. It is a grim picture and a difficult backdrop for companies.

While some frontier markets, such as Egypt, have been equally hard hit, we find a number of frontier markets where inflation remains within a standard historic range, allowing interest rates to rise only moderately – Indonesia, or Vietnam, for example. At the same time, many frontier markets, such as Hungary and Chile – through prudence or necessity – have shown significant fiscal and monetary discipline, which contrasts starkly with the largesse seen in developed countries. Of course, there are exceptions: Turkey has seen inflation top 80%, while in Argentina, inflation soared to nearly 80% from a year earlier2

It is also worth noting that some countries in our universe are beneficiaries of higher commodities prices. There are frontier countries that are significant exporters of oil in the Middle East or of soft commodities in Association of Southeast Asian Nations (ASEAN) and Latin America. In 2022, the Gulf Cooperation Council region is currently on track to report the highest current account and fiscal account surpluses for eight years3

Equally, we see other forces at work in frontier markets. Post-Covid, Dubai has emerged as a truly global financial centre, and the workplace of choice for those in creative industries, crypto enthusiasts, and finance professionals alike. This has supported asset prices. Vietnam is also benefiting from a post-Covid bounce. With the majority of food produced domestically, Vietnam has been relatively insulated from soft commodity price rises to date. In Asia, we see encouraging signs of economic growth rebounding in Indonesia and Malaysia. The latter, in particular, is a beneficiary of tech outsourcing away from China.

The portfolio does not have to invest in all countries in the universe. We choose to be selective – swerving the portfolio away from the weakest frontier markets – those prone to severe inflation shocks from commodity market tightness – and steering towards the strongest and more resilient markets.

Company strength

In developed markets, company fortunes have often transcended those of the wider economy. Companies in Frontier Markets generally have much less ability to determine their own destiny.  However, we have used recent trips to find frontier market companies that have emerged from the pandemic period with strengthened market positions, improved product portfolios and in some cases, even refined their Environmental, Social and Governance (ESG) credentials.

Another key difference with developed markets is that valuations are far cheaper. Developed markets have fallen somewhat since the start of the year, but valuations in most of the frontier end of emerging markets remain attractive relative to their own history and also relative to more developed markets.

Nevertheless, we currently maintain a defensive tilt in the portfolio, which means avoiding vulnerable areas and being realistic about the prospects for individual companies. In Thailand, we are concerned that the gap between interest rates and inflation is at unprecedented levels, and we expect significant further rate hikes.  In many pockets of the Middle East we think that valuations start to look up.

It is our view that the outlook for many frontier markets may be brighter than many imagine. Certainly, there are vulnerable areas, but there are countries and companies in the world’s smaller economies that continue to thrive in spite of the global economic outlook.

You might also enjoy reading  BlackRock Frontiers Investment Trust benefited from its exposure to Eastern Europe in October

This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are from BlackRock as of September 2022 and may change as subsequent conditions vary.

1Bloomberg, BlackRock, Aug 2022

2Reuters, Sep 2022

3Bloomberg, HSBC, Aug 2022

For more information on this Trust and how to access the potential opportunities presented by frontier markets, please visit: www.blackrock.com/uk/brfi

Risk Warnings

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Trust Specific Risks

Exchange rate risk: The return of your investment may increase or decrease as a result of currency fluctuations.

Emerging Europe risk: Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.

Frontiers risk: The Company invests in a number of developing emerging markets (“Frontier Markets”). Frontier Markets tend to be more volatile than more established markets and therefore present a higher degree of risk as they are less well regulated and may be affected by political and social instability and other factors.

Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.

Important Information

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.

This material is marketing material. The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange.

The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.

Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.

The BlackRock Frontiers Investment Trust plc currently conducts its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust.

Any research in this material has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This material is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

Find more news, interviews, share price & company profile here for:

Good news travels fast (but only if you make that happen). Share on:

Twitter
LinkedIn
Facebook
Email
Reddit

AIM All Share Index