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From war, to inflation, to the legacy of the pandemic, 2022 has presented some extraordinary challenges for the world’s smaller economies. While it has still been possible to find opportunities, it is not a year that most investors would like to repeat. Nevertheless, there are reasons to be more optimistic about 2023.
A key feature of 2022 has been the rising cost of capital. Many smaller emerging market countries have raised rates fast in response to inflationary pressures– particularly those in Latin America and Eastern Europe. Chile has seen the highest rates since 1996,1 for example, while in Hungary rates have hit 13%.2 Often, these countries moved ahead of major markets and raised far faster.
This has been problematic in 2022, raising the cost of borrowing for companies and citizens alike. It has been particularly difficult for countries and companies that have a significant reliance on external capital. Equally, very few of these countries were in a position to give substantial handouts during the pandemic. Financially, the Covid period was very difficult, but has left governments under less financial pressure.
Shifting interest rates
However, for 2023, it means many countries could see a turn in the interest rate cycle ahead of major markets such as the US or Europe. These may be the first countries to cut rates. These countries tend to be very cyclical and do best when there is a shift in liquidity conditions. The point at which a country goes from a rate rising cycle to a rate cutting cycle can be an important moment. Stock markets often start to do well as they anticipate rates being cut. The trust has a higher weighting in selected banking stocks to capture this trend.
There are countries within the universe of the BlackRock Frontiers Investment Trust that have seen little impact from inflation. Vietnam, for example, has seen inflation at just 4.89%,3 while some countries in the Middle East have also been largely untouched by inflationary pressures. These countries are likely to be at a natural advantage in the year ahead.
Frontier and smaller emerging markets are diversified, with separate and independent drivers for their growth. For example, Middle Eastern countries have benefited from higher oil prices. Countries in the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) are seeing the highest fiscal and current account balances in just under a decade.4 These strong government finances are trickling down into spending programmes. We have been investing in areas such as real estate, consumer and healthcare companies to take advantage of this growing trend.
A number of countries are also benefiting from the reopening after Covid. This has happened much later in areas such as Southeast Asia, but we are seeing tourism flows come back in countries such as Vietnam and Thailand.5 This may also be a potent impetus for the year ahead.
There are other, longer-term considerations. We are keeping a close eye on global politics for example. Many of the countries in which the trust invests have been studiously neutral in the growing geopolitical tensions between Russia, China and the US. This makes them well-positioned to benefit from any realignment of manufacturing. For example Vietnam has received huge investment from Korea.6
These smaller emerging markets still look very cheap versus global indices. Many of the holdings in our portfolio continue to deliver consistent growth in earnings, pay dividends and trade at attractive valuations. While much has changed in the global outlook, little has changed for many of the companies in our portfolio – they are delivering growth and yield at compelling valuations.
1 https://countryeconomy.com/key-rates/chile Country Economy – 31 January 2023
2 https://countryeconomy.com/key-rates/hungary Country Economy – 31 January 2023
3 https://tradingeconomics.com/vietnam/inflation-cpi Trading Economics – 30 January 2023
4 https://tradingeconomics.com/united-arab-emirates/current-account-to-gdp Trading Economics – 30 January 2023
5 https://www.cnbc.com/2022/06/23/travelers-return-to-southeast-asia-but-inflation-could-hurt-recovery.html CNBC – 23 June 2022
6 https://vietnamnews.vn/economy/1346450/viet-nam-hopes-to-attract-more-capital-from-south-korea.html#:~:text=In%20the%20first%20nine%20months,projects%2C%20worth%20over%20%243.8%20billion. Vietnam News - 18 October 2022
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Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
Trust Specific Risks
Exchange rate risk: The return of your investment may increase or decrease as a result of currency fluctuations.
Counterparty risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Currency risk: The return of your investment may increase or decrease as a result of currency fluctuations.
Emerging Markets risk: Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.
Frontier Markets risk: The Company invests in a number of developing emerging markets (“Frontier Markets”). Frontier Markets tend to be more volatile than more established markets and therefore present a higher degree of risk as they are less well regulated and may be affected by political and social instability and other factors.
Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
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Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.
The BlackRock Frontiers Investment Trust plc currently conducts its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct
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