Frontier markets have faced significant challenges in recent years, particularly from mid-2022 onward, as aggressive rate hikes by central banks – especially the Federal Reserve – triggered capital outflows, currency devaluations, and rising debt costs. Inflation, geopolitical instability, and governance issues further eroded investor confidence and growth prospects. Mattias Martinsson, Chief Investment Officer at frontier markets specialist Tundra Fonder, describes this period as “the worst crisis since the Asian Financial Crisis of 1997-98 if you look at the average currency depreciation.” However, he likens the current environment to the early 2000s post-crisis period, suggesting that the recovery is still in its early stages, with a long path ahead.
Tundra Fonder defines frontier markets as lower-middle-income and lower-income economies, typically with a GDP per capita below $4,500. Many of these markets – such as Pakistan, Sri Lanka, Bangladesh, Egypt, and Nigeria – have endured severe crises in recent years. “But now, for the first time, we see no major expected event disrupting these markets,” says Martinsson. “These countries have corrected currency overvaluations and regained political stability.”
“But now, for the first time, we see no major expected event disrupting these markets. These countries have corrected currency overvaluations and regained political stability.”
Mattias Martinsson, Chief Investment Officer at Tundra Fonder.
Looking back at history, Martinsson believes that frontier markets may be in a similar position to the early 2000s after the Asian Financial Crisis. “If we examine how these markets performed after the crisis, the following decade was actually very strong,” he notes. However, he cautiously adds that past performance is no guarantee of future returns, though history often rhymes. “I’m not saying this is the perfect time for frontier markets to take off, but the similarities with previous post-crisis environments are striking.”
Signs of Recovery
This recovery is evident not only in top-down macroeconomic indicators but also at the micro level, based on firsthand observations in the field. Martinsson and his team, who frequently travel to frontier markets, have seen clear signs of improvement on the ground. “Markets like Sri Lanka, Pakistan, and Bangladesh are all in the recovery phase,” he notes. “Pakistan is about one-third into its recovery, which is already reflected in the equity market. Sri Lanka has also made significant progress. Bangladesh, however, still needs to fully turn the corner in its crisis cycle, but we expect that to happen around mid-year,” he explains.
“First and foremost, these markets offer strong growth potential that will last for decades. Lower-middle-income and low-income countries have consistently outgrown developed markets and will likely continue to do so.”
Mattias Martinsson, Chief Investment Officer at Tundra Fonder.
Despite these improvements, investor sentiment remains cautious. “After four to five years of severe crisis, many investors still want more evidence of recovery before turning bullish,” Martinsson explains. Despite lingering uncertainties and occasional setbacks, frontier markets continue to offer compelling opportunities. “First and foremost, these markets offer strong growth potential that will last for decades. Lower-middle-income and low-income countries have consistently outgrown developed markets and will likely continue to do so.”
The Case for Active Management
While frontier markets offer strong growth potential, they also come with unique challenges, reinforcing the need for active management. “The primary issue in these markets is that corporate quality, on average, tends to be lower,” says Martinsson. “Management teams are generally not at the same level as those in the U.S. or Sweden. Additionally, state governance risks are a concern, as judicial systems in these countries are often less developed than in Western markets.” Successfully tapping into this growth requires identifying companies that can navigate such complexities. “More importantly,” he emphasizes, “it’s crucial to find businesses with owners and management teams that are transparent and aligned with minority shareholders.”
“There is undoubtedly a high level of risk in these markets. However, for those who can successfully navigate the complexities, the opportunities are immense. These are markets where active management matters a lot.”
Mattias Martinsson, Chief Investment Officer at Tundra Fonder.
“There is undoubtedly a high level of risk in these markets. However, for those who can successfully navigate the complexities, the opportunities are immense. These are markets where active management matters a lot,” emphasizes Martinsson. The risks and challenges inherent in frontier markets have significantly shaped Tundra Fonder’s investment approach in these regions.
Tundra’s Three Pillars
At the core of Tundra Fonder’s investment philosophy are three key pillars: corporate quality, growth potential, and positive societal impact. “The first and most important is the strength of the owners and management. This constitutes nearly half of our due diligence process,” Martinsson emphasizes. “When you have strong, honest owners and capable management, coupled with the inherent growth in these markets, you have the foundation to succeed –because demand for products and services is always high.”
The second pillar of Tundra Fonder’s investment approach is a focus on growing companies, specifically those experiencing what Martinsson refers to as “structural growth.” “We want the growth to outpace the overall economic growth. In a sense, this acts as a hedge for us,” says Martinsson. “Having worked in emerging markets for nearly 29 years, I can’t even count how many times I encountered stocks that seemed super cheap – where multiples appeared too low, and I was convinced they’d eventually revalue. But often, they remained at those levels for years.” However, with strong growth fundamentals, “a stock would need to become significantly cheaper to prevent you from making money. At the very least, investor returns will align with the company’s earnings growth over time.”
“The first and most important is the strength of the owners and management. This constitutes nearly half of our due diligence process.”
Mattias Martinsson, Chief Investment Officer at Tundra Fonder.
The third and final pillar addresses the second-largest risk in these markets: state governance risk. “This includes the risk of government interference, such as introducing new tariffs or taxes, or even the taxman showing up at your door. To mitigate this, we focus on companies that have a positive impact on society,” explains Martinsson. “By positive impact, I mean companies that are good employers, pay their taxes, comply with local environmental laws, and treat their employees well. These are the kinds of companies that politicians want to showcase,” he continues. “It may sound cynical, but from a business perspective, it’s simple: when companies contribute to societal growth, they are less likely to be targeted by the state.”
Additional Considerations
These three components are essential for Tundra Fonder, but there are additional factors to consider. “Given the liquidity challenges in these markets, especially when looking beyond the largest companies, a long-term approach is necessary. Entering and exiting these markets will inevitably impact prices,” says Martinsson. With a stock-picking focus, Tundra Fonder targets markets with relatively developed equity markets. “In our universe, we typically focus on eight to ten markets at a time. The key is that quality companies need to be listed,” he adds. Smaller markets, such as Cambodia or Myanmar, with just two or three stocks listed, present a challenge. “The likelihood of finding a standout stock in such markets is probably quite low,” he concludes.
“Today, the two biggest markets in the fund are Pakistan and Vietnam, which together make up almost 50 percent of the portfolio.”
Mattias Martinsson, Chief Investment Officer at Tundra Fonder.
But by focusing on these eight to ten markets and considering factors like the quality of companies and the number of listings, Tundra Fonder tends to take relatively high weights in individual markets. “Today, the two biggest markets in the fund are Pakistan and Vietnam, which together make up almost 50 percent of the portfolio,” Martinsson explains. “We dare to do that because of our long-term conviction in what we own in these markets and the underlying liquidity that allows us to take larger positions,” he adds. “The final allocation to a single market also depends on the attractive stocks we find there. Right now, Pakistan and Vietnam offer the most opportunities,” he concludes. “The goal is to invest in businesses that can compound over time.”
