2015 was a difficult year for most equity investors, particularly those focused on the developing world.
Return volatility is to be expected, however, and Acadian remains confident in the long-term potential of the frontier asset class. For 2016, we see a number of notable investment opportunities, particularly in the following three countries (Pakistan, Vietnam and Argentina)
Pakistan‘s private sector is strengthening, driven by better governance, productive International Monetary Fund borrowing programs, and infrastructure renewal. Commercial and residential real estate is booming, improving the outlook for companies in sectors that will benefit from this activity. Additionally, Pakistan’s status as a net oil importer has been another recent boost.
All of these factors are supporting strong company fundamentals, which far outpace the frontier asset class as a whole on the basis of growth, returns, margins and leverage. Despite this, the country still remains attractively valued at 8 times the price to earnings ratio. In addition, investors are focused on the potential for an MSCI upgrade, which could be a catalyst for further flows into this market.
On the negative side, we see downside risk around the potential for currency devaluation, reduction of IMF support, and renewed political disruption.
Overall, however, we see these risks as manageable. Pakistan has been politically stable for several years and has been strongly focused on addressing militancy and corruption. Most importantly, protections for international investors and regulation of the Pakistan stock exchange are among the strongest in the frontier asset class.