QUARTERLY UPDATE & OUTLOOK FRONTIER MARKET EQUITIES

Frontier and emerging markets are witnessing a tough phase owing to the major flows directed to either US equites and/ or rising yields fixed income portfolios. With only a quarter to go for 2018, most asset managers are eyeing 2019 for some stability and new flows into equities.

The outlook for Sub Saharan Africa remains positive especially given the global sell-off in risky assets which has made share prices even more attractive. The main reason for the positive outlook in increased infrastructure investments, urbanization, foreign direct investments and increasing political stability combined with economic reforms. Nigeria will be holding general elections in February 2019, which will hopefully clear much uncertainty and enable the new government to focus on driving economic growth. In Kenya, the interest rate caps are hampering the economy from reaching its potential – it is expected that the caps will be removed in the near future. In South Africa, additional volatility will likely come from the newly created Zondo Commission which, even though it won’t have the powers to prosecute, will be able to produce some evidence of South Africa’s “state capture”. For Ghana, strong domestic demand is expected to emerge from buoyant private consumption and healthy investment activity and the external sector is expected to perform robustly next year due to favorable price outlook for Ghana’s key commodity exports. GDP, resultantly, is likely to expand by 6.8% in 2018 and 6.2% in 2019.

In North Africa, Moroccan economic growth stood at 2.8% in the Q3 after it was limited to 2.4% during the second quarter of 2018. The growth is linked to improvements in both the agricultural and non-agricultural sectors. Egypt has adopted an ambitious and politically difficult economic reform program that won the praise of international financial institutions and its main economic partners. While much progress has been made on several fronts the repeated cancellations of bond auctions has had a negative impact on foreign investors, further eroding their interest in future auctions and undermining confidence in the country’s economic management. Egyptian authorities are trying to balance two objectives: securing financial resources (including foreign) to finance their budget deficits, which would require a higher interest rate, but at the same time, they want to enhance economic activities and growth, and avoid a sharp increase in the interest bill. Any increase in the interest rate will have serious implications for the budget deficit, which is targeted to be reduced below 9% of GDP this coming fiscal year, one of the objectives under the IMF-supported program.

We remain positive in the GCC region as both Saudi Arabia and Kuwait benefitted from major index provider’s upgrades, however the regional sell off might lead to some correction in the local names as well going forward. Qatar is on the road to recovery and is one of the attractive markets in the current environment.

Pakistan’s economy is quite fragile, with the country facing a depletion of reserves amidst currency pressures and rising interest rates. The government has formally announced an IMF program, which if approved would provide a respite from declining reserves and will also put the country back on track in terms of stringent fiscal and economic reforms.

In Argentina we anticipate a near term bumpy road as inquests into alleged bribes paid to members of the former Government of Cristina ramp up. Nevertheless, given the pressures that Macri’s Government has been facing lately to achieve economic stability, these allegations may somehow help his approval rating ahead of next year’s elections while penalizing Cristina’s.

Silk Road Frontiers Fund continues to offer attractive valuations and the stocks we hold in those markets maintain a solid earnings outlook. The current Price to Earnings (P/E) of the Fund stands at 9.9x while the dividend yield is at 5.7%.