In the MSCI Frontier Market index, Asia punches below its weight, accounting for just four of its 24 constituents. We profile them here.
Asia doesn’t have as big a weight in the MSCI Frontier Market index as you might think. According to the compiler’s classification, there are just four Asian countries in the index out of a total of 24.
If that sounds strange, then the explanation lies with MSCI’s esoteric classification system. The index provider chooses to combine the former Soviet republics of the Commonwealth of Independent States (CIS) with Europe, meaning that a country such as Kazakhstan goes in the ‘Europe and CIS’ category.
Does it makes sense to combine the likes of Kazakhstan with Europe? Or should it be part of Asia? It does, after all, share a border with China.
There are good arguments on both sides of this debate, which may never be satisfactorily resolved. For the purposes of this article, we consider the four index constituents that MSCI considers to be in Asia: Bangladesh, Pakistan, Sri Lanka and Vietnam.
There are two stock exchanges in Bangladesh, one in Dhaka with a market capitalisation of $40 billion and one in Chittagong worth about $30 billion. Frontier market investors are attracted to this country because it has two qualities that frontier investors love: a large, young population, and huge room for development as millions of people pull themselves out of poverty and become consumers of a range of goods. There is also a strong belief that Bangladesh can recreate the economic boom that India has performed.
One of the main industries of Bangladesh is textiles. It’s not a wholly positive picture: conditions in garment factories have been the subject of scrutiny from aid agencies and NGOs, and wages for workers in these industries are notoriously low; however, the trade does bring in valuable revenues for the country and is helping to drive development, especially as demand for jute, a plant used for making natural fibre which was once the country’s largest export, declines in the face of synthetic alternatives.
The challenges in Bangladesh mainly revolve around poor governance, political instability – as witnessed in a boycotted election last year – and a shortage of power, which leads to frequent blackouts. However, optimists point to ambitious projects such as a plan to build the largest deep sea port in south Asia at Sonadia Island as proof that the country is on an upward trajectory.
Pakistan has three stock exchanges, in Karachi, Islamabad and Lahore. Established in 1947, the Karachi Stock Exchange is the oldest, biggest and most liquid, with a market capitalisation of about $75 billion. The other two have a large number of listings but a much smaller market capitalisation.
Pakistan is a frequent top choice among frontier market investors, who see in its vast population – it is the world’s sixth most populous country – huge potential for demographic growth.
As in Bangladesh, textiles make up a large part of Pakistan’s exports, along with leather, carpets and chemicals. The country has many of the same qualities that have been unlocked during India’s economic expansion and many Pakistanis hope to witness the same levels of growth in their country as have been seen over the border.
However, Pakistan is plagued by conflicts involving Islamist groups, namely the Pakistani Taliban. Much of the country is less secure than India, leading to increased costs of doing business. In addition, Pakistan’s power grid suffers frequent capacity problems. One bright spot is that current oil prices should help the country meet its energy needs at a lower cost.
The Colombo Stock Exchange has a history dating back to the exchange of shares in plantation companies at the end of the 19th century, however, the exchange in its current form was established in 1985. It has a market capitalisation of about $23 billion and close to 300 listed companies.
The Sri Lankan stock market was the world’s best performer in 2009. That was the year the Sri Lankan government finally crushed the Tamil Tigers and ended a civil war that had simmered and occasionally exploded through the previous decade and longer. Investors piled into the exchange, hopeful that the hostilities were over and that stability would accelerate economic growth.
Their hopes have largely been realised. In 2013, the country’s GDP grew more than 7% – faster than most other south Asian countries. The end of the war has caused a boom in one of the country’s most important sectors, tourism, with travellers now visiting the island in large numbers, including the largely Tamil north of the country, which was off limits for many years. Despite its small size, the country is also an important agricultural hub and is the world’s largest exporter of tea.
Proponents of investing in Sri Lanka say the country can profit from its strategic position, just off the south coast of India, to become a trading hub, connecting the Far East with Africa and Europe. The various port projects planned in the country are a key part of this strategy.
“Up the elephant and down the dog,” is a Vietnamese proverb that describes life’s unpredictability. The country has had its share of ups and downs in recent years, but is now looking increasingly attractive as an investment destination. The country’s stock markets, in Ho Chi Minh City and Hanoi, now have a combined market capitalisation of about $40 billion.
The country’s GDP is estimated to have increased 6% in 2014, beating the growth rate of most of its neighbours, and it has been predicted that Vietnam will become one of the fastest-growing economies in the world by 2020. Unlike a lot Asian countries, Vietnam has oil and exports a large quantity each year. It also exports fish, rice and coffee.
The building boom that has taken place in the country in recent years is impressive, though some warn of a real estate bubble. In general, the enthusiasm that has been unleashed since the country moved from a communist-style planned economy to a more liberal model has been productive, and although there have been hiccups – for instance, trouble during the Asian financial crisis in 1997 – the prevalent economic mood in the country is optimistic.
©2015 funds global asia