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After the BRICs, it’s Time to Focus on the VARPs

As featured on CNBC, Tim Love, Investment Director for emerging market equities at GAM, considers the major growth opportunities offered by Vietnam, Argentina, Romania and Pakistan.

3 January 2017

Emerging market equities were mostly wrong-footed by the US presidential election result. If President–elect Donald Trump follows through on his pledge to scrap certain trade and regulatory agreements, free trade and emerging markets could suffer.

In this highly uncertain environment it’s key to focus on the emerging economies’ domestic drivers which will shape this so-called new world order.

Since the BRICs acronym was coined over a decade ago, it has gripped investors and news headlines alike. But with the traditionally perceived growth engines of Russia and Brazil in the midst of various phases of recession, as well as fundamental policy overhaul taking place in China, investors need to find pockets of opportunity in other frontier markets: Time to introduce VARP.

VARP – Vietnam, Argentina, Romania and Pakistan – represents a collection of geographies, languages, histories and business cultures with one thing in common: they each offer major growth opportunities. The VARP economies are characterised by strong economic growth, all within the three to six per cent range, with a young demographic of workers keen to spend money.

Pakistani stocks have soared this year following an announcement from the MSCI that its equities will be included in the emerging markets index.

Improving credit ratings on the back of healthy economic growth, more manageable inflation and the government’s efforts towards fiscal consolidation have heightened investor interest in Pakistan. The country is also benefiting from numerous infrastructure projects under development as part of the $46 billion China-Pakistan Economic Corridor.

Similar to Pakistan, Vietnam’s close proximity to China has meant its economy has also benefited from China’s infrastructure roll-out programme, making it an attractive investment destination.

Vietnam’s economy expanded at an annual rate of 6.4 per cent in the third quarter of 2016, buoyed by rising foreign direct investment and exports – the country is the top producer of robusta coffee, used to make instant coffee. Manufacturing also gathered pace.

Additionally, Vietnam’s fast growing middle class means that its appetite for buying protein items such as milk is soaring as the population becomes increasingly health-conscious. As a result, we see the country’s dairy sector as an interesting investment space.

In the past two decades Romania has come out of economic turmoil and morphed into a destination for foreign direct investments, including European Regional Development Funds.

Representing a typical ‘convergence play’ into the European Union, Romania is perceived as a less risky investment as it assimilates into the economic fundamentals and values of Europe.

For more than a decade, Argentina was cut off from international capital markets after the peso was massively devalued, leaving its economy brittle and with a plethora of international debts to settle. But the current pro-business government is aiming to restore Argentina’s global reputation as an investment destination through various overhauls of the public sector and economic administration of the country.

Argentina’s President Mauricio Macri has already attempted to overhaul the country’s electricity sector – he continues to push for the removal of subsidies to allow electricity companies to charge for energy at rates closer to the cost of production. We believe that once the country manages to iron out its issues of recession and currency volatility, its banking and electricity sectors could be poised to strongly benefit.

VARP equity markets are becoming increasingly liquid and accessible to investors. While Argentina is currently benefitting from a tax amnesty on capital repatriation and is in the process of removing capital controls, Vietnam, Romania and Pakistan are easy to access locally through cash or derivatives.

To be sure, these economies face risks: Vietnam and Pakistan are dependent on the speed of Chinese developments; a stronger US dollar may hurt Argentina’s commodity-based exports, and a slower EU integration would affect Romania. However, these individual risks are unlikely to materialise simultaneously given their low correlation to each other.

The VARP economies are over 13 times smaller than BRICs and therefore we do not expect them to help drive the global economy in the same way, or to generate the same levels of returns for investors. However, these frontier markets add a deeper dimension to an emerging markets portfolio with potential attractive risk returns – because of their diversity.






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