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Emerging star performers buck global trends

Article - March 23, 2016

2015 was generally a year to forget for most emerging and frontier markets, however for a few exceptions it was also a year to break out the champagne. We take a look at some of the big movers and shakers across the emerging world in 2015 and the outlook for 2016 and beyond.

With the economic slowdown in China, Russia and Brazil in recession, the plunge in oil prices and the prospect of an increase in U.S. interest rates looming, 2015 was yet another tough year for emerging and frontier markets.

Both the Morgan Stanley Capital International (MSCI) Emerging Market and MSCI Frontier Market indexes plummeted last year, falling -14.92% and -17.67% respectively. It is estimated that emerging markets saw $531 billion worth of net capital outflows last year compared with $48 billion net inflows in 2014. However, taken on an individual basis, it wasn’t all doom and gloom for emerging and frontier markets and a few star performers bucked the global trends.

The Jamaica Stock Exchange (JSE) was the top performing stock market in the world in 2015 with gains of 96.27%. In May Jamaica became the first country in the Caribbean to introduce an online trading platform which helped to attract more investment, particularly from the diaspora in North America and the United Kingdom. But overseas Jamaicans were not the only source of capital inflows from abroad; there has been increasing investor interest from large multinationals also. Investors that were in the market at the start of last year would have doubled their money up until mid-February.

Local Jamaican brewer Desnoes & Geddes saw its shares rise more than 500% following its acquisition by Heineken; while Mexican theme-park operator Dolphin Discovery Group bought 58.5% of ordinary shares in Jamaican-based Dolphin Cove Ltd. Analysts are bullish about the JSE’s prospects for 2016, as the government plans to divest state-owned enterprises through initial public offerings. The JSE continued on its upward trend into the early part of 2016 with gains of over 6% up to the end of February.

The other outstanding performer in the Latin American and Caribbean region was Argentina, finishing 36% up on the previous year. The election of Mauricio Macri to the presidency in November bodes well for investors, as he is seen as a more pro-business, market-friendly alternative to his predecessor, Cristina Kirchner.

“This will change everything. Argentina has done so many things wrong during the last few years that even if you have half-sensible policies from a new government, it’s going to be a massive improvement,” said Bloomberg editor Gavin Serkin, who ranked Argentina third in his book, Frontier: Exploring the Top Ten Emerging Markets of Tomorrow.

All smiles in Jamaica: the tiny Jamaican Stock Exchange was the world’s top performer in 2015

In emerging Europe, Latvia, Malta and Slovakia were amongst the best performers and joined Jamaica and Argentina on the list of the top-five performing frontier markets in 2015 (second, fourth and fifth respectively). Latvia’s Riga bourse increased 45.66%, as market reforms have translated into gains on its stock exchange.

Elected in January following the resignation of Laimdota Straujuma, Maris Kucinskis is expected to follow on the reform path of his predecessor, which should help to maintain investor confidence and keep the OMX Riga rising in 2016.

Also continuing on an upward trend in the first quarter of the year is Slovakia’s SAX index, which experienced a 31.11% rise in 2015 and has been the best-performing stock market in Europe so far this year. Macroeconomic performance has also been positive, with 3% growth in 2015. The European Commission has predicted growth of 3.2% in 2016, while its debt-to-GDP ratio is expected to fall slightly to around 52%. That compares with projected GDP growth of 1.7% for the whole of the euro area this year, and a debt-to-GDP ratio of 93%.

“The recovery in the Slovakian stock exchange comes after a relatively long period of stabilisation in the country,” Jaromir Sindel, an economist at Citigroup, told the Wall Street Journal’s Christopher Whittall in February.

With three stocks – Mapfre Middlesea, Medserv and RS2 Software – more than doubling in price over the year, the Malta Stock Exchange (MSE) grew 33% in 2015. In 2016 the MSE will continue to target overseas companies in China, Turkey, Italy, Spain and Eastern Europe; and in February it launched its Shariah-compliant index in a bid to attract more investors from the Middle East.  

“The MSE’s index outperformance is a testimonial to the Maltese economy being one of Europe’s best performers, to improved corporate profits and an economy awash in liquidity. Consumer confidence is also quite strong, which along with other positive economic fundamentals should bode well for the Maltese equity market,” said MSE Chairman Joseph Portelli.

Freefall in China’s stock market was well documented last year. The bubble burst in June with shares plummeting 30% in as little as three weeks. Last year outflows hit an estimated $1 trillion, more than seven times higher than the whole of 2014, and analysts in China say that the benchmark index is yet to bottom out, meaning more difficult months ahead.

Huang Weimin, the hedge fund manager whose Chinese stock-index futures wagers famously returned more than 6,200% last year, has warned that the Shanghai Composite Index could drop another 15 percentage points in the first half of 2016, as slower growth and a weaker yen have led investors to jump ship. Economic growth forecasts for China this year have ranged from an highly optimistic 7% to a highly sceptical 3%; the IMF has called it at 6.3%.

China’s slowdown has affected everyone, including its neighbour and BRIC counterpart India. After a mediocre 2015 for its stock markets, things are not looking much better this year, with Mumbai’s Sensex entering bull territory in February for the first time since 2010, after a record bull-market run that lasted 1,514 days.  Like China it is expected to bottom out over the next few months.

India’s stocks have also been indirectly hit by the oil price slump. The Wall Street Journal reports that in the first 10 months of 2015 foreign investors had bought up $4.7 billion in shares, but between November and January had withdrawn $3 billion. Much of the selling has come from sovereign-wealth funds based in the Middle East and other regions that earn income from oil, it says, as their shrunken budgets have forced them to sell assets. But it’s not all bad news for India: while its stock markets struggle, its economy is set to grow by over 7% this year.

So with China and India’s exchanges set for turbulent year, are there any bright spots for traders in Asia? Enjoying robust growth, strong foreign inflows and with a new pro-business regime, Myanmar could be one to watch over the coming years. In December it launched the Yangon Stock Exchange, opening up to foreign investors one of the world’s last untapped frontier markets.  

There was another stock market opening last year that garnered somewhat more attention than that of Yangon: Saudi Arabia’s $500bn Tadawul Stock Exchange, which in July opened for the first time to foreign investors, representing a huge opportunity for those with an eye for the Middle East’s biggest economy.

With 169 companies spanning 15 different sectors, the opening of the Tadawul bourse to foreign capital is part of a broader plan to diversify the kingdom’s economy away from oil. However, like other bourses in large oil producing nations in the region, the Tadawul exchange will remain highly susceptible to oil prices. Since July 2014, its All Share Index has fallen around 50%. With the Saudi bourse directly linked to the oil market, many analysts agree that 2016 is not looking good. “If the oil price remains under pressure, TASI will most likely struggle for the rest of the year,” Akber R. Naqvi, executive director of Al-Masah Capital Management Limited told Arab News.

It is a similar story for other stock markets across the Gulf and the Middle East, indicative of how important it is for these countries to diversify their economies away from oil. There is huge potential for technology. As several countries across the region facilitate the growth of promising hi-tech startups, venture capital is pouring in. 

“In the past five years, the tech ecosystem in the Middle East has swelled to more than 100 funds investing in the region and more than 75 accelerators,” writes Elizabeth MacBride in a report for Forbes.

“The growth in the ecosystem stems partly from the long-term economic forces at work: the growing middle class, the rapid adoption of technology and growth in Internet penetration — and the fact that, as far as tech goes, it’s early movers’ advantage. The Middle East also benefits from a core group of local investors, who invest personally in the region, and who have ties to the finance and tech communities in Silicon Valley. Some of their work is beginning to pay off.”

One stock market has managed to significantly buck the trend in the Middle East: since the U.S.-Iran nuclear deal came into force on January 16, the Tehran Stock Exchange’s TEDPIX index has rallied about 15%, while the volume of trading by foreign investors, most of whom are European, has increased 10-fold.  “The total trade value is not remarkable yet, but it is a very good indication that foreign investors are now more enthusiastic about our market than before,” exchange spokesman Hamid Rouhbakhsh told the Associated Press in February.

Saudi Arabia’s $500bn Tadawul Stock Exchange opened for the first time to foreign investors, representing a huge opportunity for those with an eye for the Middle East’s biggest economy.

Following significant gains in 2013 and 2012, African exchanges faced a second consecutive year of difficulty in 2015, with gross returns of the MSCI Emerging and Frontier Markets Africa (excluding South Africa) Index falling 19.2%. South Africa’s Johannesburg Stock Exchange, the continent’s largest, has been on steady decline since November. And with the country’s current economic woes, the outlook for the JSE remains bleak for 2016.

Nigeria, Africa’s largest oil producer has naturally been hit hard since the oil price collapse, as well as by political uncertainty surrounding the presidential election last year. The All Share Index of the Nigeria Stock Exchange (NSE) – the second largest in Africa after the JSE – has fallen around 45% from its peak in July 2014. Oscar Onyema, Chief Executive Officer of the NSE has told reporters in Lagos that he anticipates another challenging year in 2016, adding that the Exchange would focus on structural reforms to boost investor confidence and attract new listings in the years ahead.

One to watch, Ivory Coast’s tiny BRVM exchange was one of the top performers in Africa in 2015, riding on the back of the country’s strong growth. With only 39 listed companies and a market cap of $15 billion as of December 2015, the BRVM expects to add a further 20 companies over the next three years through the privatisation of state-owned enterprises and by introducing incentives to attract more private businesses.

“While it is still difficult to attract companies to list on the regional exchange, we hope that this will change over the next three years as governments begin to drive forward with the process of privatisation and as the exchange continues to introduce preferential tax rates and the likes to boost listings and interest by companies,” BRVM chief executive Edoh Kossi Amenounve told Euromoney in February.

While it was a challenging year for African markets as a whole, PwC’s recent report, African Capital Markets Watch, paints a brighter picture. According to PwC, $12.7bn was raised in 2015 in equity capital markets (ECM) activity across the continent, with over $41.3bn raised over the past five years; while there was an overall increase in IPOs of 12% in terms of transaction volume and 17% in terms of US dollar denominated value in 2015.

Over the past five years, PwC reports that there have been 105 IPOs raising $6.1bn by African companies on exchanges worldwide and non-African companies on African exchanges. The trend looks set to continue and there will be a number of high profile IPOs over the coming years, which include the Nigerian government’s long-anticipated selling of assets in the Nigerian National Petroleum Corporation in 2018.

“Growth across the African continent will require continued investment in various sectors including infrastructure, agriculture, financial services, and telecommunications, alongside other industries more traditionally associated with Africa,” said PwC South Africa Capital Markets Partner, Coenraad Richardson. “In 2015, the capital markets reflected this continued need for investment and continued appetite from investors with key portfolio allocations targeted toward emerging and frontier markets.”