Frontier Markets Monthly Report | February

Frontier Markets ETF Monthly Report: Key Takeaways

• The FMQQ index declined by circa 10% in January, against a backdrop of a larger global tech selloff and expectations of higher rates in the US. [1]

• However, the abrupt pullback has already helped reset valuations to more comfortable levels across the FMQQ portfolio. An illustrative example is pictured below via Mercadolibre, Latin America’s leading e-commerce company and a top FMQQ holding. After peaking in early 2021, the price to sales ratio of MELI has fallen to multi-year lows. Meanwhile the prospects of the company remain unchanged. Latin America’s e-commerce penetration is c.5% versus 25% for China. [2]  That opportunity to accelerate from a low base explains why 3 of the top 10 markets for e-commerce growth this year are expected to be in Latam. This all while the company remains profitable. 

• While it’s difficult to call a bottom, valuations have begun to pull in dramatically while the long-term growth prospects of the underlying companies have not altered.

For illustrative purposes only. Source: Bloomberg Terminal Data

For illustrative purposes only. Source: https://www.reuters.com/business/emerging-markets-better-equipped-deal-with-fed-rate-hike-cycle-sp-2022-02-17/

Macro Outlook

• Let’s address two macro points. The first is very topical: interest rates. The second is a reminder of the long-term picture. 

• While markets are anticipating higher rates in the US, the tightening cycle is already well underway in most emerging markets. [3] Central Banks across EMs have been proactively raising rates since 2021, rendering the asset class much more prepared for US rate hikes than in past cycles. [4] To quote S&P Global: By several measures, most EMs seem to be better prepared to weather the upcoming tightening Fed cycle than past ones. The differential in EM inflation with that of the U.S. is much lower today than it was during the most recent previous Fed tightening cycle (late 2015 to early 2019).” [5] Countries like Brazil and Russia have been particularly hawkish on raising their benchmark interest rates over the last 12 months. This appears to be already heavily discounted in most FMQQ companies in those markets. 

• Stated otherwise, while an expected normalization in rates is creating volatility on US exchanges, interest rates across most FMQQ countries are already on the rise. And valuations are beginning to reflect that.

• Now for a small dose of the long-term story, quickly captured in the chart below. Over the next 20 years, India (a key constraint of the FMQQ Index) is projected to add more smartphone users (+686M) as the combined populations of the US and the Euro Area today (672mn).  This is an example of the playing field which FMQQ companies operate and the tailwinds they should enjoy over the next 2 decades. While the markets iron out details around rates today, these stories will continue to unfold in the background.

For illustrative purposes only. Source: https://www.statista.com/statistics/467163/forecast-of-smartphone-users-in-india/

 Frontier Markets ETF Performance (As of 31.01.2022)

Performance before inception is based on back tested data. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. Source: Bloomberg / HANetf. Data as of 31/01/22. Please note that all performance figures are showing net data.

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