Allan Gray Frontier Markets Fund, 31 MAR 2025

By: Varshan Maharaj, fund manager of the Allan Gray Frontier Markets Equity Fund

There continues to be little interest in the frontier universe among global investors. And this is precisely why these markets continue to pique the interest of Allan Gray.

“Companies in frontier markets are currently valued much lower than similar companies in developed countries — which make them very attractive for us as contrarian investors,” says Varshan Maharaj, fund manager of the Allan Gray Frontier Markets Equity Fund.

He says that an inflow of bad news and poor sentiment led to low share prices in recent years in these markets, which subsequently led to good returns for those who were able to be buy at low valuations when others were fearful.

“We have seen this play out in a number of frontier markets in recent years, including Sri Lanka, Pakistan, Kazakhstan and Georgia,” says Maharaj.

For investors who are looking for the ‘proof in the pudding’, look no further than the first quarter of 2025, when the Allan Gray Frontier Markets Fund returned 9.2% in US dollars, while the MSCI Frontier Emerging Markets Index (FEM Index) returned 6.8% in US dollars. Furthermore, its holdings continue to offer good value with high profitability and attractive valuations, represented by the weighted average five-year return on equity of 27% and historic price-to-earnings ratio of 10.3.

Maharaj adds that Allan Gray still sees value in these markets, and that there is plenty of “honey” to be found in markets that are currently out of favour, with good businesses trading well below their fair value estimates.

One such market is the Philippines, which is a consumption-based economy with key drivers including the business process outsourcing (BPO) sector and remittances from overseas Filipino workers.

“Among other factors, the possible impact of artificial intelligence on BPO revenues and political uncertainty have led to waning investor interest and declining sentiment. This is evidenced by the low and declining value traded on the Philippine Stock Exchange and the low valuations that Philippine companies trade at, both in relation to their history and to our assessment of fair value,” explains Maharaj.

He adds that over the long term, many consumer-facing Philippine companies stand to benefit from the growing demand from their young, large population. Per capita consumption levels for many fast-moving consumer goods (FMCG) are still low when compared to other nations. “This suggests a long runway for growth that one is not paying for at current valuations.”

Another interesting market is Vietnam, which, says Maharaj, has achieved impressive economic growth for a prolonged period, driven by its export-focused economy.

“The USA’s third-largest trade deficit is with Vietnam, and fears of trade wars have contributed to elevated foreign investor outflows from Vietnam and the de-rating of many stocks. We are using this sell-off to add to our existing holdings and also to identify new opportunities,” he says, adding that an additional catalyst is the possible upgrade of Vietnam to emerging market status, which would bring more buying interest to this market.

In Africa, Nigeria could offer frontier investors some opportunity.

“We continue to monitor policy reforms in Nigeria. The exchange rate of the naira stabilised against the US dollar in the second half of 2024, and several companies have had rights issues in recent months, which could improve investor confidence in the region,” concludes Maharaj.

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