The eye-popping gains in some Asian equity minnows this year may broaden out to include larger frontier peers, as improving macroeconomic conditions bode well for earnings.
The equity benchmarks of Pakistan, Laos and Sri Lanka are the biggest gainers in the region in 2023. A loan deal with the International Monetary Fund has helped spark a rally of more than 60% in the KSE-100 Index this year, while easing interest rates are supporting a 28% surge in the Colombo All-Share Index.
The sharp gains in the minnows are raising hopes that the rally may extend to markets such as Bangladesh and Vietnam, amid signs global investors are becoming comfortable with riskier assets even as a debt crisis brews across the wider frontier region. Lower borrowing cost in some of these markets also supports their bullish case.
“The rally in Asian frontier markets will continue and broaden in 2024, as dovish monetary policies and economic recovery will drive a rebound in earnings,” said Ruchir Desai, a Hong Kong-based fund manager at Asia Frontier Capital Ltd. The AFC Asia Frontier Fund has outperformed 98% of its peers this year, according to Bloomberg-compiled data. The 12-month forward earnings estimates for members of the MSCI Frontier Asia Index — which consists of stocks from economies that are smaller and riskier than emerging markets — have risen more than 8% this quarter.
Valuations are also attractive, with the gauge trading at 9.8 times forward earnings, well below the five-year mean of 13.8 times, data compiled by Bloomberg show.
Pakistan may see more inflows as local asset managers turned into net buyers this month, said Ali Raza, head of international equity trading at BMA Capital Management. Foreigners turned into net purchasers of the South Asian nation’s shares in November after two months of outflows.