A Market Plus Article.

Mattias Martinsson is Chief Investment Officer and partner of Tundra Fonder AB, a Swedish asset manager specialising in Frontier Markets. Martinsson, who regularly visits Switzerland, will be again in Switzerland in May, on the 8th and 9th in Geneva and on the 10th and 11th in Zurich. In this two-part interview with MarketPlus, he explains what is particular about Frontier Markets and the peculiarity of Tundra Fonder in this regard.

«We focus entirely on what we call the next generation of Emerging Markets, what we call the Frontier Markets. These are basically Emerging Markets that are about to enter the state which India, Brazil, Russia and China have already achieved. Frontier Markets for us are countries like Pakistan, Vietnam, Bangladesh, Sri Lanka, Nigeria, Kenya and Egypt. These are markets that count just below 800 million people, with an average GDP just below 2,000 dollars and a population twice as big as the Eurozone.

Just after World War II Japan suddenly became an industrialised nation, then it was the turn of Taiwan and South Korea, then China. Six years ago, with the crisis it became apparent that China didn’t want to be any longer the low-cost producer of the world. There was a shift when a lot of new foreign facilities were set up in countries, primarily Vietnam, that became beneficiaries of the globalization.

We also see this is now happening in Pakistan, Bangladesh, Sri Lanka and the whole of East Africa. Those markets are trying to follow the historical pattern of globalization mimicking what today’s Emerging Markets could achieve in the last 30 years; Frontier Markets are about to enter the world market, they are going to have a more effective role and faster penetration from foreign investors than the traditional Emerging Markets. It is likely these historical patterns will repeat themselves: no one wants to pay more for their cell phone than they did yesterday, cell phones need to be better and better but still cheaper and cheaper. Samsung electronics now produces more than half of their phones in Vietnam, so it’s already happening».

How did you choose Pakistan to be so prominent in the first place?

«I think that for me it was a longtime dream to start this fund. I started by covering the Russian market in 1996 with a Swedish broker that pioneered Russian equity from Scandinavia. That was before there were any Russian funds in the world, our firm launched the first one in Scandinavia and that is how I got exposed to Emerging Market: I was 23 years old at the time and at this firm I learned a lot about Emerging Markets. After the Russian crisis of 1997-8 with the consequent Russian equity market index falling 97.5%, our desk needed to diversify to survive, and looking selectively at other Frontier and Emerging Markets we came across Pakistan in 2005.

Even though I believe to be an open-minded person, I had such a clear preconception about Pakistan (as still most people we talk to have today!). When I started to investigate, and understand better the market, I saw that its turnover was almost the same as the Singapore Stock Exchange – it was between 500 million to 1 billion USD daily at the time, which was a huge market; and it was driven by local industrials, 80-90% were domestic investors and, most importantly, the companies were applying international accounting standards.

Many of the bigger companies had been around for 50-60 years. The oldest listed company has actually been listed for 116 years and is an alcohol producer. I changed my views on the market and in 2008, two weeks after the Prime Minister Benazir Bhutto was assassinated, I went back again and the visit clearly was at a difficult moment. That said, in a week I travelled to Karachi, Lahore, Islamabad where I met entrepreneurial companies who managed to survive the crisis, that were outgrowing Indian companies in terms of revenue.

I came back and tried to find a fund to invest in, and I discovered that there were no funds managed by a foreign fund manager. Pakistan is one sixth of India in terms of population but there were a thousand India funds and not a single Pakistan fund. I saw an opportunity, to be on a completely different market on all aspects, to be the first to launch a Pakistan fund. I am still convinced today that Pakistan is a market that deserves to have a fund for itself.

From the beginning, we said to ourselves that if we wanted to be serious in doing this and therefore we have this pioneering advantage, we need to set up an office locally, so we opened the Karachi office in 2014 and today the office has 6 professionals working for Tundra».

Do you think that the economic development in these markets can be seen as decoupled from the trends seen in bigger markets – EU, USA, China? How strong is the correlation?

«I have a good drawing which shows historic and economic development of our core markets and projections dating back to 2010 from the IMF: you will find that all our core markets are growing two times faster than Developed Markets and this is expected for the next five years as well. That said, Frontier Markets will be affected by the global growth, demand, etc., but they are mainly driven by domestic consumption and domestic drivers: on average, less than 40% of the population lives in the city compared to 80% in the developed world. People who don’t have a salary get into the city to get a job, even a very simple one, and they are becoming consumers. Every year 1-2% of the population gets into the city to get some job, better or worse jobs, anyway they are all becoming consumers and that means higher infrastructure, higher taxes, putting children into schools and a very generic growth.

When it happens for approx. 800 million people, you can easily imagine the total effect and how much stronger they can grow compared to the Developed World. If we look at the last ten years, at what is happening right now, and what is expected in the next 4-5 years – despite all possible hurdles – these countries will continue to outpace to grow at much higher levels than all others. And this is what makes them so attractive and from an investment perspective potentially so rewarding if you approach them in the right way».

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