[Vnbiz] Taking stock on the new frontier

[Phan, Tai]

Taking stock on the new frontier
Smallest markets squeeze the so-called BRIC economies
By Alexis Xydias and Michael Tsang Bloomberg NewsPublished: February 19, 2007


NEW YORK: The smallest emerging stock markets are elbowing aside Brazil, Russia, India and China to become the world's best performers.

An index of 22 so-called frontier countries rose 12 percent in January, the fastest-ever start to a year. Five of them, including Vietnam, Ukraine and Croatia, are among this year's top 10 markets. A measure of BRIC stocks fell after a 53 percent gain in 2006 made Indian and Chinese shares the most expensive among the biggest emerging nations.

JPMorgan Chase, Templeton Asset Management and Julius Baer Holding started funds in the past six months to buy shares in the smallest economies, betting they will outperform larger developing markets that have rallied for four consecutive years.

"We've started to go into some of the frontier markets," said Terrence Gray, New York-based managing director of emerging markets at DWS Scudder, which manages $114 billion. "We're just trying to find better value."

Gray bought shares of KazMunaiGaz Exploration & Production in September when the unit of Kazakhstan's state oil and gas company raised $2 billion in the nation's largest initial public offering. He may invest in banks and agricultural commodity producers in Mauritius, Nigeria and Zambia, after cutting his firm's holdings in China and India last year.

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 Citigroup may list shares on the Tokyo Stock ExchangeFrontier markets, as defined by Standard & Poor's, are dominated by companies too small and too thinly traded to be "investable" for most fund managers. The acronym BRIC was coined by Jim O'Neill, chief economist at Goldman Sachs Group, in November 2001. He said Brazil, Russia, India and China would join the United States and Japan as the biggest economies in the world by 2050, eclipsing most of today's developed nations.

The S&P/IFCG Frontier Markets Composite Index has gained 35 percent in the past 12 months, compared with a 28 percent increase in the Morgan Stanley Capital International BRIC Index and 12 percent advance for the S&P 500.

Last month's surge in the 272-member frontier markets index, whose members have a median market value of $241 million, was the biggest gain in January since S&P's calculations started in 1996.

Frontier stocks are cheaper than shares in India and China - which trade at an average 26 and 40 times earnings, respectively - though they are becoming more expensive.

Stocks in the S&P/IFCG Index traded at an average 17 times earnings last month, near the highest ever and 40 percent higher than the average over the 11-year history of the index. The price-earnings ratio for S&P/ IFCG index is also about 10 percent higher than for the MSCI Emerging Markets Index.

Frontier markets have been valued at an 18 percent discount on average during the past decade. Stocks in Bangladesh, Bulgaria, Ivory Coast, Mauritius and Slovenia rose last month to their highest price-earnings ratios this decade.

"Everybody is so positive and bullish that, as a consequence, valuations have become very rich," said Patrick Scheuber, head of equities at Swisscanto in Zurich. "We are not at the beginning of a cycle, but rather at the end of it." His firm, managing $1.6 billion, recently sold holdings in Vietnam.

Accelerating economic growth, the prospect that more governments will embrace capitalism and more initial public offerings have lured additional money to frontier markets.

Vietnam's Ho Chi Minh City Securities Trading Center VN Index has jumped 45 percent this year, the biggest gain among the 83 benchmarks tracked by Bloomberg.

PetroVietnam Drilling & Well Services Joint-Stock, the nation's fifth largest company by market value, paced the advance.

The Vietnamese economy may have Southeast Asia's fastest growth in 2007. The government expects 8.5 percent expansion, up from 8.2 percent in 2006. Last month, the government said it will sell stakes in three of the biggest state-owned banks this year.

Investors are losing some of their enthusiasm for China and India, the world's two fastest-growing major economies, a Merrill Lynch survey showed.

More money managers planned to cut stakes in Chinese companies on a net basis for the first time in at least four months, and India is the region's least favored market, according to the survey Wednesday.

An index of Chinese stocks traded in Hong Kong has tumbled 3.7 percent after a 94 percent gain in 2006. India's Sensitive Index quadrupled during the past four years. Gains slowed to 4.1 percent this year.