VARPS: An uncorrelated frontier market opportunity


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GAM Investments’ Tim Love provides an update on VARPS (Vietnam, Argentina, Romania, Pakistan and Saudi Arabia) and discusses the current investment case for each of the five markets.

07 September 2021

In 2016, GAM Investments’ emerging market (EM) equity team identified five key markets within the frontier universe potentially offering strong risk / reward: Vietnam, Argentina, Romania, Pakistan and Saudi Arabia, which we named VARPS. This subset of countries has captured the better part of the MSCI Frontier Markets Index performance recently. In 2020 Romania and Saudi Arabia were upgraded to the main MSCI Emerging Markets Index, leaving just Vietnam, Argentina and Pakistan as true frontier plays. However, we view VARPS as a group which is significantly uncorrelated to the main EM index, and provide an update on each of the five countries below, highlighting the current challenges and areas where we see economic progress and investment opportunities.

Chart 1: Frontier markets have underperformed but key VARPS countries have outperformed for less risk

Source: Bloomberg, GAM. Data from 21 July 2016 to 31 July 2021. Past performance is not a reliable indicator of future results or current or future trends.


Vietnam equities have continued to outperform this year, up circa 16% in US dollar terms year-to-date to 9 August 2021. We believe the Vietnam investment case remains a robust one despite the ongoing lack of democracy and press freedom in the country. In our view, its primary growth is driven by manufacturing and commodity exports (based on wages roughly one third of those in China with low-tariff trade access to the US and European Union (EU)), domestic consumption and infrastructure, driven by high urban density, job creation and low inflation (circa 4%). Vietnam’s low domestic political risk (under the one-party state) and the recently confirmed succession, coupled with tourism upside and low risk on currency are further positives. However, foreign ownership limits still somewhat spoil the investment case, in our view; given that merely 23% of the MSCI Vietnam Index is accessible to foreign investors, which can materially heighten illiquidity risk.

Ironically, Vietnam’s highly effective management of the Covid-19 crisis and its pole position in taking advantage of the China plus one strategy in manufacturing has meant that there has been no repeat of the pressure to accelerate reforms this time round (fiscal deficits are circa 4%, growth is circa 7%, and underlying banking non-performing loans are below 5% and short-term external debt is merely 9% of GDP). We remain vigilant to what we view as the key investment risks for Vietnam: power struggles within the communist party which are not publicly visible (but have occasionally resulted in unforeseen corruption investigations of corporate executives or delays in regulatory approvals), an ageing population, and a loss of momentum behind economic liberalisation (privatisation, foreign ownership limit increases).


Argentina has been one of the weaker frontier plays; in fact MSCI recently announced reclassification of Argentina from EM to a standalone market due to prolonged capital controls, macro imbalances and micro policy distortions at the industry level. Limited progress in these areas keeps sovereign and equity risk premiums elevated. With economic stagnation since 2011, we believe that for Argentina to regain its competitiveness and for foreign direct investment (FDI) to grow again, significant structural reform needs to be implemented. Specifically, we look for a) progress on the macro stabilisation plan front and b) material macro policy change post upcoming mid-term election in November 2021. Unfortunately, we believe the country has very little left to lose in terms of FDI, post this controversial and socialist-leaning administration. It has furthermore been hurt, as has the Latin American region, in GDP per capita terms by the Covid-19 pandemic. We will look for a better entry point from a valuation perspective as and when these reforms become a reality.

Given this domestic backdrop, the tech sector is one positive segment of the market growing at rapid speed in Argentina, adding value to the nation’s exports. The software industry currently employs 120,000 people and the government hopes to grow that figure to half a million employees by 2030. Globant, a software solutions company and Mercado Libre, a dominant regional play on ecommerce, have performed strongly during 2020 / 2021, as examples. Post the November elections, we will re-examine the exporters, such as steel and agriculture plays. The dominant risk / reward will focus around the possibility of greater capital control risk and lack of material structural reform. As a result, we favour ADR programmes in terms of exposure to the market, as opposed to the local share class.


A study by Deloitte listed Romania, together with China, Chile, Australia, Lithuania and South Korea, as one of only six countries in the world whose GDP had grown during the pandemic. Romania represents a mere 0.1% of the MSCI EM Index. It has outperformed over the past year but remains attractive, in our view, with an almost 7% dividend yield. Romania has been a member of the EU since 2007 and has demonstrated a track record of high GDP growth, sustained poverty reduction and rising per capita incomes. The government acted swiftly in response to the pandemic crisis, providing a fiscal stimulus of 4.4% of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Romania’s outlook for macroeconomic growth and inflation is favourable: 6.0% and 4.8% real GDP growth and 2.8% and 2.5% inflation in 2021 and 2022 respectively, according to forecasts from the International Monetary Fund (IMF). However, twin deficits are the problem, particularly the fiscal deficit, which at 9% in 2020 is much larger than current EU membership criteria. A political mandate is critical to credibly commit to the EU’s need for reduction of this deficit where the IMF currently forecasts 7.1% and 6.3% in 2021 and 2022 respectively. The prospects of having access to the circa EUR 30 billion of the European Commission’s recovery plan puts the country in an unprecedented favourable context, in our view.


We note there are green shoots emerging in Pakistan’s macro picture of late; although inflation remains high and the circular debt keeps piling up, Pakistan received record remittances of USD 29.4 billion during the last financial year, partially offsetting a bounce in the trade deficit. The country has almost completed the Financial Action Task Force (FATF) action plan, with only one outstanding action. We also believe a generational improvement in governance is underway, military-civilian relations are sustainably stable, infrastructure is undergoing an upgrade under the China Pakistan Economic Corridor, albeit expensively, and relations with India cannot get worse because of the nuclear deterrent. All encouraging signs, in our view. However, risks do remain especially high unemployment post pandemic and continuing population growth of circa 2% per year. The military intelligence deep state in Pakistan remains dominant in the political economy and is becoming more so as the relationships with US and Saudi Arabia are not as solid as in previous years. Many state companies have shrunk meaningfully in size and hence the asset / liability mix has materially changed. This has left Pakistan more reliant on China FDI such that China is now increasingly the international geopolitical partner of Pakistan, helping with key infrastructure projects, as well as with security provision across all provinces for its own physical supply chain security. We will continue to assess opportunities in Pakistan as the picture improves.

Saudi Arabia

We maintain our long-term positive outlook on Saudi Arabia, helped by its consumer and workforce liberalisation, along with loosening of restrictions in leisure and travel sectors. The introduction of VAT, the Aramco stake sale, fiscal borrowing and its access to surplus cash reserves underpins the investment in non-oil sectors. Saudi Arabia’s growth is dependent on the success of its diversification programme. All these measures, along with relaxation on foreign ownership, should continue to unleash the growth of new sectors for the country. However, such reforms have long gestation periods and it is not yet clear if Saudi Arabia is going to be competitive in non-oil sectors, from a global perspective. One statement in its favour is that it appears to be succeeding in its diversification plans more progressively than a similar petrodollar state in as Russia. The latter has been materially held back by its present western sanction headwinds. Furthermore, while Saudi Arabia has become a part of the mainstream for global investors in public equities (the seventh largest market in the MSCI EM Index, with a 3% weight), the same cannot be said for FDI.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.

Tim Love

Investment Director
My Insights

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