Many stocks in frontier markets also fit into Mobius’ favourite category: bargain. The markets of Estonia, Kazakhstan, Latvia and Panama, for example, are all trading at a price-to-earnings ratio lower than eight. In comparison, the US and Japan are trading at measures of 17 and 16 respectively. Since few asset management firms or brokerages are actively pushing out the frontier, early investors can take better advantage of their inherent inefficiencies.
As if the listed markets of emerging and frontier economies are not interesting or challenging enough, Templeton has sought private transactions in these countries. It holds investments in manufacturers of wind power engines, tyres, fruit juice and, prospectively, abalone and amino acid pills. The deals tend to involve manufacturing and consumer businesses. Mobius says there are more private equity targets in these sectors within frontier markets, since similar opportunities in emerging markets were long ago gulped up by multinationals. While smooth transactions are rarely expected in these markets, they are not as troublesome as some outsiders might assume. “People think that Russia is lawless and unsafe. Some of the best private equity deals that we’ve got have been there.”
But it does not necessarily require any infringement of the law to see the value of a stock holding or private deal head south. “The biggest fear we have is not being able to get out. We’re willing to take the internal risk of prices going down, but we would hate to not get money out.”
This fear has kept the firm from private equity investments in China. To manage this risk in Vietnam, Templeton has structured some of its allocations as loans to be repaid, not equity.