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Sub-Sahara Region Most Favored Frontier Market By HSBC Global Asset Management
28 November 2012
New York, NY - Sub-Saharan Africa encapsulates the best of what the next generation of emerging markets* has to offer investors in terms of potential investment returns over the long term according to HSBC Global Asset Management.
Andrew Brudenell, manager of the HSBC Frontier Markets Fund available to U.S. investors said: "Nigeria is our favourite market in Sub-Saharan Africa and is an area we have been adding to. Within the oil-rich nation, financials are showing robust potential while consumer brands are also enjoying strong growth as result of the expanding consumer market. In addition Kenya, the regional hub for trade and finance in East Africa boasts - as is the case with frontier markets in general - cheap valuations and a number of advantageous macroeconomic factors, resulting in what we believe is a positive outlook. The telecommunications sector there has long-term investment potential given its ties to mobile banking, a rapidly growing sector."
The HSBC Frontier Markets Fund's largest holdings currently are in the financial, telecommunications and energy sectors. GDP growth is presently strong in most frontier markets and valuations remain attractive on both a trailing P/E (price-to-earnings) and P/B (price-to-book) basis in absolute levels, relative to traditional emerging and developed markets as well as their own history.
Brudenell added: "Stocks in frontier markets are trading 40% lower than the pre-crisis levels of August 2008, whereas both traditional emerging markets and developed markets have almost entirely recovered their losses. Profitability (ROE, Return on Equity) also remains higher than in developed markets and is rapidly narrowing the gap with traditional emerging markets. Frontier markets historically have behaved as late-cycle markets and we believe they are benefiting as these regions enter a more mature stage of recovery."
Brudenell also expects frontier market banks to continue to benefit from credit growth and consumer-branded companies are enjoying the spending power of a larger, wealthier middle class. "Earnings and cash generation have been strong especially within Nigeria and the United Arab Emirates. In addition, infrastructure spending will likely benefit those companies involved in construction, such as cement and steel businesses and real estate firms. Frontier markets have historically offered higher dividend yields than both traditional emerging and developed markets, with the equity markets of some countries offering average dividend yields of up to 8%. While there are headwinds which could impact frontier markets we believe volatility in frontier markets should remain low compared to global equity markets."
Frontier markets are a subset of emerging market nations which are typically at an earlier stage of economic, political and financial development. They potentially offer investors higher growth rates and returns over the long term than both traditional emerging and developed markets, albeit with a higher risk profile and the associated increased risk of capital loss.
They are typically less well researched and less liquid, creating inefficiencies which create the potential for investors to benefit from any mis-pricings. They overall possess many structurally attractive and strong demographics, including a rising middle class, young populations, rapidly developing infrastructure as well as strong production and exports of commodities. The frontier markets asset class has historically been less volatile than traditional emerging markets and they are one of the least correlated equity classes globally, providing attractive potential diversification opportunities.
Frontier Market Regional Outlooks
- Sub-Saharan Africa: Nigeria remains our favorite market in Sub-Saharan Africa given what we believe to be potentially cheap valuations and a positive macro-economic outlook.
- Middle East & North Africa: We are focused on the Gulf Cooperation Council (GCC) countries, specifically the United Arab Emirates and Saudi Arabia. Outside the Gulf, we remain more upbeat on the recent political changes in Egypt than the market and our long-term outlook for the country remains positive.
- Latin America: We remain underweight currently based on relatively expensive valuations for frontier markets in the region. We are closely monitoring the situation in Argentina following events in the oil sector earlier this year.
- Asia: Valuations for frontier markets in Asia generally remain high so we are underweight frontier markets in this region. Pakistan is our favored country in the region with cheap valuations and a high dividend yield. Pakistan's continued discussions with the IMF and improved relations with the U.S. add to our positive sentiment.
- Eastern Europe: Our exposure remains relatively low and very domestically focused with no holdings having direct exposure to troubled Euro-zone countries. Kazakhstan remains our largest country exposure as valuations there, in our opinion, remain cheap.
HSBC Global Asset Management, the core investment business of the HSBC Group, manages assets totalling US$416bn and is a leader in emerging markets funds, with more than US$144bn of assets managed in global, regional and country specific emerging markets strategies across a range of asset classes as at 30 September 2012.
Notes to editors:
* The Frontier market investment universe includes but is not limited to the following countries: Argentina, Bahrain, Bangladesh, Botswana, Bulgaria, Cambodia, Colombia, Croatia, Cyprus, Ecuador, Egypt, Estonia, Georgia, Ghana, Indonesia, Ivory Coast, Jamaica, Jordan, Kazakhstan, Kuwait, Latvia, Lebanon, Lithuania, Morocco, Namibia, Nigeria, Oman, Pakistan, Panama, Peru, Philippines, Qatar, Romania, Serbia, Slovakia, Slovenia, Sri Lanka, Trinidad and Tobago, Tunisia, United Arab Emirates, Venezuela, Vietnam, Zambia and Zimbabwe.
HSBC Global Asset ManagementHSBC Global Asset Management, the core investment business of the HSBC Group, manages assets totalling US$416bn and is a leader in emerging markets funds, with more than US$144bn of assets managed in global, regional and country specific emerging markets strategies across a range of asset classes. HSBC Global Asset Management has a worldwide client base of private clients, intermediaries, corporates and institutions invested in both segregated accounts and pooled funds. HSBC Global Asset Management fulfils its purpose of connecting these customers with investment opportunities through an international network of offices in approximately 30 countries, delivering global capabilities with local market insight. (All figures as at 30 September 2012). For more information see www.assetmanagement.hsbc.com
HSBC Holdings plc
HSBC Holdings plc, the parent company of the HSBC Group, is headquartered in London. The Group serves customers worldwide from around 6,900 offices in over 80 countries and territories in Europe, the Asia-Pacific region, North and Latin America, and the Middle East and North Africa. With assets of US$2,721bn at 30 September 2012, the HSBC Group is one of the world's largest banking and financial services organisations.
The HSBC Frontier Markets Fund is U.S. registered and may be offered to all U.S. investors with the appropriate risk tolerance. The Fund trades in Share Class A (HSFAX) and Share Class I (HSFIX).
The material in this document is for information only and does not constitute investment advice or a recommendation to any reader of this material to buy or sell investments. The information included in this document is based on sources believed to be reliable. However, we have not independently verified such information and make no guarantee, representation or warranty and accept no responsibility or liability as to its accuracy or completeness. All opinions expressed herein are as of the date produced and are subject to change without notice. This information is not intended to provide professional advice and should not be relied upon in that regard. You are advised to obtain appropriate professional advice based on your own individual circumstances and should consult your adviser before considering a specific transaction.
There are risks associated with investing in a fund that invests in securities of foreign countries, such as erratic market conditions, economic and political instabilities and fluctuations in currency exchanges.
Prices of securities in emerging markets can fluctuate more significantly than the prices of companies in more developed countries. Securities of emerging market issuers generally have more risk than securities issued by issuers in more developed markets. The less developed the country, the greater affect the risks may have in an investment, and as a result, an investment may exhibit a higher degree of volatility than either the general domestic securities market or the securities markets of developed foreign countries.
Frontier market countries generally have smaller economies and even less developed capital markets or legal and political systems than traditional emerging market countries. As a result, the risks of investing in emerging market countries are magnified in frontier market countries. The magnification of risks are the result of: the potential for extreme price volatility and illiquidity in frontier markets; government ownership or control of parts of private sector and of certain companies; trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which frontier market countries trade; and the relatively new and unsettled securities laws in many frontier market countries.
The Fund may use derivatives in connection with its investment strategies to hedge and manage risk and to increase its return. Derivatives may be riskier than other types of investments because they may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the Fund's original investment.
Diversification does not guarantee a profit or protect against a loss, and cannot eliminate the risk of fluctuating prices and uncertain returns. The Fund is considered to be ânon-diversifiedâ under the Investment Company Act of 1940, as amended (â1940 Actâ), which means that the Fund may invest a greater percentage of its assets in a more limited number of issuers than a diversified fund.
HSBC Global Asset Management (USA) Inc. serves as investment adviser to the HSBC Frontier Markets Fund and receives fees for such services.
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