Aberdeen’s Young: Why I am avoiding frontier markets

31 Mar

Hugh Young is steering clear of opportunities in frontier markets over fears of a repeat of the collapse seen in Vietnam in 2009.

Young, who is managing director of Aberdeen Asset Management’s Asia division and oversees £24bn in AUM, has not jumped on the frontier markets bandwagon because he sees them as too risky.

“Frontier markets are a popular marketing story, but the region can also be dangerous. Vietnam is a good example, everyone got excited, but the companies were dreadful. A lot of mone
y poured in and now the market has collapsed,” he said.

The Ho Chi Minh City Stock Exchange’s VN index peaked in February 2007 at 1,137, then bottomed out in February 2009 at 241. It is currently trading at around 454.

What happened in Vietnam has deterred Young from investing in other popular frontier markets, which are currently attracting investor attention.

“People are getting very excited about Burma, for example, despite the lack of access to it. There is one company – Yoma Engineering and Trading – the share price of which has increased fivefold. We were tempted, but we tend to buy the reality rather than what people promise. We prefer to wait to see if they do what they are saying.”

The only frontier market in which the manager invests is Sri Lanka, where he holds blue-chip Aitken Spence, DFCC Bank, the National Development Bank, and online supermarket Keells.

Young said Sri Lanka does not have the same risks as other frontier markets because it is home to both multinational and home-grown companies. Meanwhile, he favours Asian financials, although he has been avoiding major banks in China and Australia for some time, finding better opportunities in Singapore, the Philippines, Malaysia and India.

“In this part of the world, banks are pretty much plain vanilla, just offering mortgages and credit cards. They do not do the daft things that banks do in the West. The tight regulatory environment put in place here eliminates the chance of them making the same mistakes,” he said.

Last year, Young reduced his exposure to cyclicals including consumer stocks, and bought into other areas, including HSBC, which he has bought back into for the first time in 15 years after the bank renewed its focus on Asia.

26th March 2012
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