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VARPS: Time For Reflection

7 May 2019

GAM Investments’ Tim Love reflects on the tremendous opportunities that exposure to frontier markets can offer and explains his views on the outlook for Vietnam, Argentina, Romania, Pakistan and Saudi Arabia in 2019, cautioning that close monitoring of such markets is essential.

The BRICS acronym emerged years ago to represent a group of countries ie Brazil, Russia, India and China that were collectively perceived to be the growth engine of the world. Over the years as some of these countries went through economic hardship or policy changes, investors started to turn their attention to frontier market plays that offer interesting opportunities for growth but that are in earlier stages of the development cycle.

Our favoured frontier markets have been VARPS – Vietnam, Argentina, Romania, Pakistan and Saudi Arabia – countries which have yielded investors great trading opportunities over the last few years. We explain our outlook for these markets this year.


Vietnam has performed very well over the last few years and it is a country that we continue to remain very positive on. The country has witnessed strong, stable economic growth over the last decade and this is expected to continue in 2019. Domestic reforms have also helped to boost the country’s agricultural exports, such as fishery and coffee, while construction projects are in abundance owing to the country’s growing status as a popular tourist destination. A growing middle class has also boosted sectors such as dairy as consumers turn their attention to health products and a more nutritious diet. In addition, we believe Vietnam’s inclusion to the MSCI index later this year should keep valuations high.

However in March, Vietnam confirmed its first cases of African swine fever and while there is a risk the disease outbreak could become widespread, it has so far has been localised to the Northern Province which borders China. We will continue to monitor this situation closely.


President Mauricio Macri’s government is trying hard to rebuild Argentina into an investment destination through various reforms; yet the country remains a political risk in our view and there are issues also on the currency front.

We believe there are a number of domestic issues and a wide scale programme of monetary and fiscal tightening is likely to keep Argentina’s economy in a state of recession this year. It will be interesting to see what unfolds on the reform front and it could be wise wait for some of these headwinds to abate. For this reason, we believe a reduced exposure to local Argentina plays is advisable and American Depositary Receipts (ADRs) can be a preferable option to access Argentine stocks. Still, we believe that once the country manages to iron out its issues of recession and currency volatility, its banking and electricity sectors could emerge to be very attractive.


Romania in essence is a typical ‘convergence play’ into the European Union (EU) and has benefitted from several strong tailwinds over the years. For example, the country has its own currency, the Romanian leu, and the central bank here applies a managed float which reduces currency fluctuations. Romania has also benefited from EU reconstruction funds as well as the local companies making very good progress in obtaining a high level of ESG (Environmental, Social and Governance) performance levels – together, all of these factors make Romania a more investable destination, we believe.

But Romania’s government shocked investors in late 2018 by placing a tax on its banking sector, triggering a slide in the country’s banking stocks and signalling a more socialist stance from the government. In turn, ratings agencies threatened to downgrade their outlook for Romania and the move attracted criticism from eurobloc members and the Romanian Central Bank. In the aftermath of this announcement, the bank taxes have been partly repealed however it remains uncertain how the country’s public finance shortfall will now be addressed.

As a result, we are more cautious regarding Romanian investments and have moved a wait-and-see mode. We would need to see a change in the government policy stance before moving back to a more optimistic stance.


Pakistani stocks soared in mid-2018 following an announcement from the MSCI that its equities will be included in the emerging markets index.

While the country with a hefty population of 97 million is a beneficiary of the numerous infrastructure projects falling under the USD 46 billion China-Pakistan Economic Corridor, there are some risks here, namely the rising tensions in the Kashmir region and the country’s large current account deficit. Nevertheless, valuations here are currently extremely attractive and in particular, we like exposure to cement companies because they are simple and politically uncomplicated - they tap into the country’s booming construction.

Saudi Arabia

We believe Saudi Arabia has more attractive prospects owing to the huge privatisation programme taking place which aims to unlock state-owned assets. A new reformist government is aiming to diversify the economy’s dependency away from hydrocarbons and we expect Saudi insurance companies and banks to be the beneficiaries of such a move. Should the right opportunities arise, we feel Saudi Arabia is worth considering from an investment perspective over the course of 2019.

Ultimately, we believe it is worthwhile incorporating frontier market exposures within an emerging market portfolio primarily because they provide access to upcoming growth markets that will likely be included into the MSCI EM equities index at some point, in our view. Also, we believe that these frontier markets offer an aspect of diversification to a wider EM portfolio as they are non-correlated in nature due to their lower levels of liquidity in comparison to the more developed EM markets, like China or India. However, as highlighted above the political and economic climate of these countries can be volatile and it is important to keep a close eye on any changes.

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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 for the current or future development.