Quarterly update and outlook for frontier market equities

We expect frontier and emerging markets to remain volatile in the second half of 2018 due to the regional and domestic political uncertainties in addition to the potential adverse impact of the ongoing trade war.

We also believe that there is a compelling window of opportunity in the Frontier Markets as a result of being mostly ignored by investors amid all the scary headlines about US presidential antics, a global trade war, the Brexit saga, and the rhetorics about a shift in monetary policy. 

But regardless of this political 'vaudeville', a number of our markets of focus are showing compelling fundamentals that - in our opinion - haven't been priced in yet.

Here are some of the highlights of our recent report:

Kenya is expected to see an increase in the corporate tax rate going forward as suggested by the Treasury Minister in his latest tax measures in the 2019 budget as the country’s debt to GDP level is already close to the 60% threshold. This would reduce the overall corporate sector profitability.

We remain positive in the GCC region as both Saudi Arabia and Kuwait benefitted from major index provider’s upgrades or reclassification to Emerging markets status.

Qatar is on the road to recovery as Fitch has revised its outlook to ‘Stable’ from ‘Negative’ and has also affirmed its Long-Term rating at 'AA-.

Morocco’s government is still targeting 3.6% economic growth for the full year, based on improving agricultural production in the second half of 2018, and rising phosphate prices.

Pakistan’s political climate is heating up as elections are scheduled for the 25th of July and the two major parties are facing major corruption investigations and charges. Economic indicators continue to worsen as the government is facing significant headwinds due to widening trade and budget deficits. The tax amnesty scheme announced in April was unsuccessful forcing the government to rely upon additional borrowing, causing pressure on the local currency.

Despite Bangladesh’s positive economic growth prospects, continued pressure on the Taka has hampered the economy.

The long-awaited MSCI upgrade of Argentina to emerging market status was announced at the end of June but didn’t provide much respite to the negative trend in equity markets. The confirmation is, however, still expected to drive passive and active flows leading up to the actual inclusion in May 2019, 10 years after the country was downgraded to frontier market status.

We have concerns related to the possibility of a recession as the economic slowdown is being exacerbated by the worst drought in the last 30 years. Strikes and general malcontent are also weighing on Argentina and are undermining Macri’s re-election prospects for 2019.

Despite a number of yellow flags in the frontier universe, the Silk Invest New Horizons Frontier Fund continues to offer attractive valuations and the stocks we hold in those markets maintain a solid earnings outlook.

The current Price to Earnings (P/E) of the Fund stands at 11.7x while the dividend yield is at 4.3%.

The Fund has shown resilience in a difficult quarter due to its conservative positioning. We expect market conditions to normalize during the next quarters and we consider our portfolio as well positioned for that environment...

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