Stockholm (Ekonamik) – “When approaching potential investors, we want to present them with a clear theme,” says Mattias Martinsson (pictured), Chief Investment Officer (CIO) at Tundra Fonder in a recent interview at their offices in Stockholm, Sweden.
“MSCI and FTSE define frontier markets as emerging market economies that are illiquid. This leads to the inclusion of a range of countries that are widely disparate in terms of their economic conditions. Unless you are looking for diversification, we do not think that the story of Pakistan, Egypt, Nigeria or Vietnam has much in common with the story of Iceland or Estonia” he argues. “At Tundra Fonder, we are index agnostic. To us, frontier markets are early emerging markets. They are economies that are at the developmental stage that traditional emerging market economies were 20 years ago. They have limited market liquidity, a GDP-per-capita of around US$2,200 and large, young populations.” the CIO explains.
Selectively Opening Up New Markets
Martinsson is one of the founding partners of Tundra Fonder. “My first job out of university in 1996 was as an advisor for HQ Bank, a Swedish broker, where I focused on Russian Equities. It was a very good learning experience as I was exposed to the meteoric rise of that market before its dramatic collapse,” he remembers. “Then in 2005, as we were expanding away from Eastern Europe, I came across Pakistan.”
“Eventually, I became convinced that the average view of Pakistan was considerably worse than actual conditions implied. The country had a robust private sector dominated by family-owned corporates, many of whom had been established for over a century. The market was turning over US$500 million a day,” Martinsson explains. “A visit in 2008 confirmed my suspicions and upon returning I was ready to invest in a Pakistan fund, when to my surprise, I realised there was none. There were hundreds of India funds but not a single Pakistan one,” he reveals enthusiastically. “We set up Tundra in 2010 and launched the Pakistan fund in October 2011. Our vision paid off. Between 2012 and 2016, the Pakistan fund was the best performing 5yr fund in the Swedish pension system.”
“The broader Frontier fund was launched in 2013, in line with our in-house vision of frontier markets,” the CIO continues. “We are invested in Egypt and Pakistan even though they are normally considered emerging markets. We also have a presence in Vietnam, Bangladesh and Sri Lanka, Nigeria and Kenya.” Tundra does not, however, invest in the Gulf Cooperation Council (GCC) countries included in the MSCI index. “Kuwait and Bahrain are a very different story, which is not in tune with Tundra’s theme. Being in those countries requires a completely different set of skills and expertise,” Martinsson explains. “Our index agnosticism also shields us from index liquidity issues that may emerge when countries like Argentina and Kuwait are upgraded to the Emerging Market index.”
“Originally, the fund was 100% retail. The idea was to provide these investment opportunities to as broad an investor universe as possible. Since then, our success has attracted the attention of institutional investors. Pension funds, insurance companies, county councils from Sweden, Canada, South Africa and Switzerland now represent 35% of our investor base,” the CIO explains.
Macro Insights and Local Expertise
“Beyond the thematic clarity and track record, I think that our careful analysis of the sustainability of inflation, GDP and local interest and exchange rate dynamics, as well as fiscal trends and balance of payment conditions, allows us to present a clear story to investors,” says the CIO. “The other part is stock picking, which is supported by dedicated and experienced local resources in two of our core markets which are able to provide on-the-ground expertise.”
“This approach yields clear investment outcomes. 90% of our assets are in 6 of the 7 countries we define as our core markets, at the moment. We actually have pulled out of Kenya, due to a concern that their macroeconomic imbalances are not properly discounted for in equity market valuations”.
Currencies, Interest Rates and the Trade War
Exchange rates have been a dominating concern for Tundra Fonder recently. “The last year has been about currencies,” says Martinsson. “With interest rates rising in developed countries in early 2018, international investors moved their cash back, depreciating local frontier currencies in and making refinancing of deficits more difficult, which hurt returns of investors in Argentina, Egypt, Turkey and Sri Lanka.”
Tundra Fonder does not hedge its currency positions, according to its CIO. “It’s a conscious choice on our part. The cost of insuring against currency depreciation is more expensive than what is implied by the long-term inflation differentials we observe in our portfolio countries,” says Martinsson. “Generally speaking, we see a 3% to 4% annual currency depreciation, until they have managed to build an industrial base.”
The two other two dominant market themes were China and the trade war with the USA. “We have seen some investment moving to Vietnam to avoid the trade war with the US. However, one should be careful. Vietnam is one of the top 10 countries with a trade surplus with the USA. Given President Trump’s view of trading relations, no country is completely safe,” warns the CIO.
With relation to China in general, he seems to strike a more positive note. “Pessimists have predicted China’s slowdown for quite some time, without it actually materialising,” Martinsson notes. “China plays a large role in the global economy and has recently been shifted towards a consumption and services economy. They do not do anything in the short run only. They have been moving their production to other, less developed countries and opening their domestic capital markets to foreign investors as the economy becomes more sophisticated. This is also good because China’s partnerships expand access to everyone, including ourselves.”
“In our countries, interest rates have been going up, so we expect interest rates to start coming down in a year or so. For this reason, we expect equities to enter a positive trajectory sometime during the next 12 months. I am a strong believer in mean reversion, so I am very optimistic about the future. If you have the stamina to have a 3- or 5-year horizon, you should have fantastic times ahead,” Martinsson concludes.