Citi rating model tops Sri Lanka as most attractive frontier market

Citi rating model tops Sri Lanka as most attractive frontier market
February 28, 2018,

Andrew Howell, frontier markets strategist at Citi says Citi has used data to build a rating model for the leading frontier markets, which gives investors a macro view of prospects for 12 countries. The model currently shows Sri Lanka, Romania and Kenya as the most attractive markets based on six key metrics: earnings momentum, price momentum, valuation, macro growth and imbalances and monetary policy. "We thought Sri Lanka was cheap, but it turns out it’s really cheap," Howell noted. "It’s a market you probably want to look at closely."

Another key theme developing in frontier markets investing is increased transparency, according to Andrew Howell. Recent improvements in published data and in analyst coverage has made it possible to measure earnings and share-price momentum, which are key elements in an accurate valuation model, Howell said.

"More analysts’ forecasts are available, companies themselves have just got better at communicating what’s going on, and investor relations functions have expanded quite dramatically," Howell told the WSJ. The downside? "Portfolio managers might find it harder to get an information edge."

Frontier markets are in prime position to pioneer the use of blockchain technologies and to lead in the use and development of cryptocurrencies, according to frontier-focused investment bank Exotix. "We may be at the beginning of another episode of technology leapfrogging as frontier economies move straight to blockchain distributed ledgers and cryptocurrencies as alternatives for weak domestic institutions and capital controls," Paul Domjan, Exotix’s global head of research, said.


In an interview with WSJ Frontiers, Domjan argued that blockchains, which underlie cryptocurrencies such as Bitcoin and Ether, could be invaluable in recording contracts, enabling transactions and establishing ownership in countries where institutions are weak. The cryptocurrencies themselves are already proving popular in countries such as Zimbabwe and Venezuela where faith in the conventional currency is low.

Exotix made its prediction in a report on the key themes that could provide new opportunities for investors in frontier markets. Among the other themes it identified were China’s changing engagement with frontier markets from a predominantly extractive relationship to one based more on partnership, and the impact of mobile money—particularly the evolution of e-commerce businesses built around mobile money services.

Another key theme developing in frontier markets investing is increased transparency, according to Andrew Howell, frontier markets strategist at Citi. Recent improvements in published data and in analyst coverage has made it possible to measure earnings and share-price momentum, which are key elements in an accurate valuation model, Howell said.

"More analysts’ forecasts are available, companies themselves have just got better at communicating what’s going on, and investor relations functions have expanded quite dramatically," Howell told the WSJ. The downside? "Portfolio managers might find it harder to get an information edge."

Citi has used the data to build a rating model for the leading frontier markets, which gives investors a macro view of prospects for 12 countries. The model currently shows Sri Lanka, Romania and Kenya as the most attractive markets based on six key metrics: earnings momentum, price momentum, valuation, macro growth and imbalances and monetary policy. "We thought Sri Lanka was cheap, but it turns out it’s really cheap," Howell noted. "It’s a market you probably want to look at closely."