Three shrewd plays on frontier markets

Professional investor Hedi Ben Mlouka looks at three stocks profiting from rising consumer spending in frontier markets.

Each week, a professional investor tells MoneyWeek where he'd put his money now.This week:Hedi Ben Mlouka, CEO of Duet MENA and CIO of Duet EM Frontier funds.

Rising consumer spending is a long-term reason to be bullish on frontier markets. And the sliding oil price offers an extra boost for those countries who are net oil importers, such as Pakistan, Egypt and Kenya. These nations have historically had to cope with juggling high oil prices and the increasing energy demands of their growing populations.

So the 60% drop in oil prices since June 2014 has greatly improved their current-account balances, given that oil accounts for as much as 40% of their import bills. As lower fuel and energy bills leave people with more disposable income, and governments enjoy more budget flexibility, it can only be good for consumer spending.

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Take Kenya. It's sub-Saharan Africa's fifth-largest economy. Over the last three years, it has seen average annual GDP growth of 4.8%, and it has a current-account deficit of 8.1%.

Based on the projected slide in its oil import bill (around 25% of total imports), the World Bank recently revised its GDP growth forecast to 6% for 2015 and reckons the current-account deficit will fall to 4.7% in the next two years.

In southeast Asia, Pakistan's inflation has slowed to low single digits from double-digit levels only a few years ago and the central bank is expected to cut interest rates again this month.

It's not easy for small investors to buy individual stocks in these markets, but I think it's worth looking at some of the opportunities out there to illustrate the wider changes. So with these trends in mind, pharmaceutical group The Searle Company (Pakistan: SEARL) in Pakistan is a good play on rising disposable income as a population urbanises and becomes more middle class, it tends to spend more on health too.

Despite a regulatory freeze on price increases which has been in place since 2001, Searle has managed 27% compound annual growth in its earnings over the last four years, helped by its evolving product portfolio and rapid growth. With the government now linking price increases to inflation, the company's growth prospects have markedly improved further.

Power distribution in Africa is also attractive. There's a strong correlation between a country's economic growth and its energy consumption, so Kenya's sole electricity distributor, Kenya Power & Lighting Company (Kenya: KPLL), should benefit from improved growth prospects.

With the government committed to connecting 70% of the population to the grid (from 32% now), while investing in an extra 5,000 MW to support the requirements of major infrastructure projects, all signs point to sustainable growth for the utility yet it only trades on 0.6 times book value.

Finally, in Vietnam, Mobile World Group (Vietnam: MWG), a leading phone and electronics retailer, should benefit from rising disposable income. It has 25% of the mobile retailing market in Vietnam, which is down to its efficient working capital management, procurement and pricing strategies. MWG could further consolidate its market position by growing its store network by about 50% over the next two years.

Keep in mind that, while not all frontier economies are the same for example, the distinction between net oil exporters versus importers is worth considering certain secular themes apply to all of them, and will prevail in the end. As a shrewd investor, you have to identify the stocks well placed to benefit from these themes and to ignore the noise from short-term distortions.

Hedi Ben Mlouka is manager of the Duet Frontier Fund.