Ride this Asian tiger for profits

delfeldTo get ahead, you need to look ahead and hunt for value.

Unfortunately, when investors think of Asia and emerging markets, only China and perhaps India come to mind.  These are big complex countries with huge challenges and very difficult to manage. This is why both have stumbled recently.

Meanwhile, many other countries in Asia are zooming ahead. These “frontier” markets have many more motorcycles than cars on the road and some don’t even yet have a McDonald’s.

Frontier markets offer investors a combination of great value, huge upside and unique challenges. As giants like China run into growing pains, higher costs and negative returns, frontier markets are up–propelled by a bit more political stability and easy access to modern communications, technology and capital.  The simple smart phone has connected every citizen to the global economy as well as MIT’s free online education.

My case for you to leapfrog over China to frontier markets and Southeast Asia is simple and powerful. Frontier countries are far behind developed countries like Japan and America and even playing catch up with countries like Thailand, South Korea and China, but they are catching up fast. Imagine a chance to invest right now in the China of 1980 when its wages were at rock bottom levels and it exported in a year what it now does every day.

Youthful populations and the move of workers from rural areas to higher income jobs in the cities are supercharging growth in these economies. The median age of many of these countries is at the demographic sweet spot of 25 years, compared to 35 years in China and South Korea, and 45 years in Germany and Japan.

This explains the optimism driving families to open their first bank account and purchase new houses, washing machines, refrigerators, cars and better food and medical care. This, in turn, explains why big companies from Japan, China, America, Europe and South Korea are falling over themselves and each other to invest in frontier Asia. And it’s not just lucrative new consumer markets and rising tourism that’s driving this wave of capital but the need to access the region’s ample natural resources.

Evidence of this optimism and virtuous cycle of growth is everywhere. Since 2009 and the cooling of its civil war, Sri Lanka’s GDP has surged 40% and is now double that of India on a per capita basis. The 12th-largest shopping mall in the world is in Dhaka, Bangladesh and a $20 billion energy investment by Exxon Mobil in Papua New Guinea has the potential to double the size of its economy.

Having a slice of frontier Asia in your portfolio actually reduces risk and volatility. Why? Because these markets beat to their own drummer rather than just going up and down with world stock markets like most asset classes. And right now, these markets are on sale. One fund portfolio I follow is trading at just six times earnings and just a tad over book value while offering a juicy 5.3% dividend yield. But like maneuvering a motorbike in and out of chaotic traffic, investing in these frontier markets requires experience and steady hands.

The Templeton Frontier Market fund is perhaps the best known but has recently closed to new investors. You might consider the Asia Frontier Fund, http://www.asiafrontiercapital.com/ that I like for a number of reasons. First, 46% of its portfolio is in consumer stocks aiming to capture the young and rising consumer class. Second, I agree with the fund’s 20% top weighting to Vietnam and the intelligent strategy of investing in each country’s strengths such as tourism in Sri Lanka, mining in Mongolia, food companies in Vietnam and textiles in Bangladesh. Here’s the kicker: many of the companies in the portfolio have significantly lower valuations compared to similar emerging and western companies, making them attractive acquisition targets. As a bonus, the portfolio sports a nice 4.4% dividend yield to cushion risk.

As an example, here is one company in the fund that Asia Frontier Capital CEO and portfolio manager Thomas Hugger likes right now:

Vietnam Sun Corp. is the leading taxi operator in Ho Chi Minh City (and no doubt knows about weaving in and out of motorcycle packs) with a fleet of close to 4,000. The company also has operations in other cities such as Binh Duong, Dong Nai and Da Nang. The company will increase fleet size in Ho Chi Minh City and also expand into new markets such as Hanoi. VNS is a good growth story with a reasonable valuation trading at less than 10 times 2013 earnings and expected net profit growth of 53% in 2013 and 29% in 2014.

Frontier Asian markets are on the move. Get onboard for a piece of the action.

Opportunity awaits,

Carl Delfeld.


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