Our central investment theme for this year is that the political upheaval that marked 2011 will eventually fade away and that investors will return to fundamentals and increase their allocations to frontier markets… “The Sun Also Rises”.
Investors are starting 2012 with a realistic assessment of the challenges that the world is facing. Frontier markets were not able to deliver in 2011 but their negative equity returns of around -25% were in line with the Euro and BRIC markets.
Moreover, these numbers should be read within the historical events that took place in especially the Arab markets.
We are proud to see our core regions moving towards more democracy and although change is never smooth, we are very confident of the final outcome. We are encouraged in our conviction by the relative speed of changes and the solid resilience of the corporate sector and real economy in even the most affected countries. Politics had a negative short term impact but did not derail the growth fundamentals.
Political upheaval was not limited to the frontier markets in 2011 and rippled also through most of the developed world with Southern Europe experiencing the biggest changes. The new governments that took over on both sides of the Mediterranean all share a liberal economic agenda and their main focus will be on cleaning up.
Silk Invest expects that investors will eventually move their attention to fundamentals and will on the bond side favour governments with solid balance sheets and will on the equities side favour companies with solid earnings and yields. Within this environment, we believe that investors will move towards the frontiers, which have the potential to become the world’s best performing regions in 2012.
Frontier regions are uniquely positioned on the equities side with companies which are growing with double digit rates and which are selling at a deep discount versus the rest of the world. On the bond side, investors can buy into lowly leveraged economies with attractive opportunities in both hard currency and local currency bonds. Private equity brings these two sides together and is another attractive asset class in these regions.
Zin Bekkali is CEO of Silk Invest, a specialist frontier market investment manager