Lowe said he likes to focus on domestic demand, saying they are looking at luxury goods, health care, leisure, education and information services sector in Asia, particularly in China. It’s important to focus on return on capital to see if the level of growth is sustainable, he added.
He said investors continue to look at gross domestic product growth to determine a region’s viability, but Lowe said long-term growth is best determined by investments, how much savings citizens have, a country’s demographics and potential for productivity gains. He said Asian citizens are good savers and productivity gains in Asia are the highest anywhere. Demographics, however, are mixed, with younger populations in southern regions like India, while northern Asian regions like Japan and South Korea have aging populations.
Rick Schmidt, portfolio manager, emerging market, frontier emerging markets at Harding Loevner, said investing in frontier markets, such as countries like Kuwait, is similar to what investors faced 20 years ago when investing in emerging markets began. “These markets don’t have the breadth or depth [of larger, more liquid markets] and there is restricted foreign direct investment, he explained.
But investing in frontier markets can offer portfolio diversification as the economic and political situations vary from country to country, unlike emerging markets which have tighter correlations. For instance, he said, Ukraine is performing poorly, but Bulgaria is doing well.
For financial advisors interested in frontier markets, Schmidt said picking a stock is just as important as picking a country. A particularly company may have a good balance sheet, but if something happens in the country where they are domiciled, such as a natural disaster or a political scandal, then the company’s stock may be unfairly impacted.