The Fortune at the Bottom of the Pyramid: Golden Opportunity for Frontier Asia

The concept of the “Fortune at the Bottom of the Pyramid” was introduced by CK Prahalad, and it describes business strategies used to profit from selling products to the poorest populations in the world.  This approach can also be applied to frontier market investing.  Frontier market investing often requires an asset-based approach (viewing opportunities presented from less developed populations/countries/industries, rather than focusing on the  challenges), as well as a futuristic view of growth trends.  Select frontier markets have the potential to economically be on par with other emerging markets in the next 20-30 years.

Cognitive Dissonance in Consumption Trends: The Fortune at the Bottom of the Pyramid

One of his most memorable quotes that portrays the contrarian method of finding opportunity where others would typically not look includes the following:

If people have no sewage and drinking water, should we also deny them televisions and cell phones?

Prahalad goes on to note that some poor populations may accept that the option of having sewage and running water is not a realistic option, but also still have a strong preference to consume things that are actually within their reach.  The cognitive dissonance in consumption habits is something I have personally observed on the ground in multiple frontier markets, and has resulted in my strong optimism for the potential of rising domestic middle-class consumption in these markets:

  • Mongolia: A ger or house will not have access to running water, is heated by fire, yet it is not at all uncommon for a ger/house to be equipped with a TV.
  • India: Some rural areas I stayed in would only have electricity for 2 hours a day, yet a large number of people had TVs, cell phones, and the internet in these areas.

Companies that have noted these potential markets, in areas such as FMCG, have already benefited strongly from their international expansion.  This concept should be implemented not only by domestic companies but companies wishing to expand their export revenue by tapping into other markets.  India offers significant opportunity as an export market due to its current low GDP per Capita, low wages, strong trends of consumption, and the massive population.


On top of some observations that can be made on the ground, statistics can show how trends of growth in these markets are strong, demographics are much more favorable, and that the growth potential for these markets is ample.  Many of these markets can be described as the “Thailand, South Korea, or Taiwan” of 20-30 years ago.  I will include a long list of statistics and some thoughts on which markets stand out during Part 1 of this insight. Part 2 will include some investment takeaways for multiple frontier and emerging market locations, which fully capture the growth of the “bottom of the pyramid”.



Frontier Asia offers much more favorable demographics, with an extremely high youth population, which has been an investment case for many funds choosing to target frontier Asia.

0-14 15-24 25-54 55-64 65 and Older Median Age
Bangladesh 28.27% 19.53% 39.39% 6.77% 6.04% 26.3
Cambodia 31.24% 19.02% 40.18% 5.43% 4.14% 24.9
India 27.71% 17.99% 40.91% 7.3% 6.09% 27.6
Laos 33.4% 21.3% 36.1% 5.36% 3.85% 22.7
Nepal 30.93% 21.86% 35.99% 6.22% 5.02% 23.6
Mongolia 26.92% 16.76% 45.45% 6.68% 4.19% 27.9
Myanmar 25.77% 17.13% 43.54% 7.49% 5.47% 28.6
Pakistan 31.99% 21.31% 36.87% 5.43% 4.40% 23.4
Sri Lanka 24.35% 14.70% 41.71% 9.89% 9.35% 32.5
South Korea 13.45% 13.08% 45.93% 14.01% 13.53% 41.2
Thailand 17.18% 14.47% 46.5% 11.64% 10.21% 37.2
Vietnam 23.84% 16.69% 45.22% 8.24% 6.01% 30.1

Source: IndexMundi/CIA


Some of the demographic hot spots include Vietnam, where there is not only a large youth population, but the median age is at a point where consumption is strong, at 30 years old.  This has been a catalyst for the increased growth in consumption and urbanization, while the country’s past compelling high youth population was less powerful since teenagers/people in their early 20s are not the strongest consumers in an economy.  On the other hand, markets such as Pakistan, Nepal, Laos, and Cambodia will be at a more favorable point further down the line, due to the following shared characteristics: more than half of the population is under 24 years, and over 30% of the population is under 14 years old.


The Rise of GDP in Frontier Asia

Many frontier markets can be considered similar to emerging markets 20-30 years ago, in terms of GDP, and have the potential to catch up to other emerging markets.


Country GDP(USD Billion) GDP Per Capita(USD)
Mongolia 11.76 3,973.4
Laos 12.33 1,812.3
Cambodia 18.05 1,158.7
Nepal 20.88 732.3
Myanmar 64.87 1,203.5
Sri Lanka 82.32 3,926.2
Vietnam 193.60 2,111.1
Bangladesh 195.08 1,211.7
Pakistan 269.97 1,429.0
Philippines 291.97 2,899.4
Singapore 292.74 52,888.7
Malaysia 296.22 9,766.2
Thailand 395.28 5,816.4
Indonesia 861.93 3,346.5
South Korea 1,377.87 27,221.5
India 2,073.53 1,581.6
Japan 4,123.26 32,477.2
China 10,866.44 7,924.7

Source: WorldBank/Trading Economics


GDP Per Capita: Markets such as Pakistan, Bangladesh, and Vietnam are some frontier markets that are lagging behind in terms of GDP per capita, and also have large enough populations to potentially emerge as some of the most dominant economies in Asia in the future.  India’s GDP per capita also substantially lags behind its emerging market peers in Asia, leaving the market open to experience ample growth in the future.


Examining the Past: Markets such as South Korea, Taiwan, and Thailand provide a benchmark of how some of these frontier markets can eventually achieve substantial growth in GDP, heavily catalyzed by low-cost manufacturing advantages.

Annual GDP

South Korea Taiwan Thailand
1980 65.2 42.3 33.4
1986 115.5 78.2 44.5
1996 598.1 292.7 183.0


South Korea’s GDP was $115.5 billion 30 years ago, which significantly lags behind the current GDP of markets such as Pakistan, Bangladesh, and Vietnam.  Moreover, the current population for these markets greatly exceeds South Korea’s current population (especially true for Bangladesh and Pakistan), providing select frontier markets with the opportunity to emerge as leading countries in Asia.


Taiwan’s GDP was only $78.2 billion 30 years ago, which is lower than the current GDP for Sri Lanka and the above-mentioned markets.


Thailand’s GDP was $183.0 billion 20 years ago, slightly below Vietnam and Bangladesh’s current GDP of $193.6 and $195.1 billion respectively.  The country’s GDP was substantially lower, at $44.5 billion, 30 years ago.



The higher population found in select frontier markets is another selling point for frontier market investing. Frontier markets such as Vietnam, Pakistan, and Bangladesh stand out for having substantially higher populations, as compared to other emerging markets.


Country Population(Millions)
Vietnam 91.8
Thailand 67.9
Sri Lanka 21.0
Pakistan 188.0
Myanmar 53.9
Mongolia 2.9
Malaysia 30.3
Laos 6.8
South Korea 50.6
India 1,311.1
China 1,371.2
Cambodia 15.6
Bangladesh 161.0
Nepal 28.5

Source: The World Bank


Annual GDP Growth in Frontier Markets


The stronger trends of economic growth present in frontier markets serve as a pretext for taking on other risks associated with frontier markets.  Apart from India, there are not very many options for emerging markets in Asia that are able to deliver the same level of growth.   Some emerging markets in Asia that delivered slower economic growth include the following: Indonesia(5.18%), South Korea(3.3%), Malaysia(4.0%), Taiwan(0.7%), and Thailand(3.5%).  India is a unique emerging market outlier to note, which has outpaced many frontier markets in GDP growth.

GDP Growth(%)

2011 2012 2013 2014 2015
India 5.5 5.6 6.6 7.2 7.5
Bangladesh 6.5 6.5 6.0 6.1 6.6
Cambodia 7.1 7.3 7.4 7.1 7.0
Laos 8.0 7.9 8.0 7.4 7.0
Nepal 4.6 3.8 5.7 2.3 3.4
Mongolia 17.3 12.3 11.6 7.9 2.3
Myanmar 5.6 7.3 8.4 8.5 7.0
Pakistan 3.6 3.8 3.7 4.0 4.2
Sri Lanka 8.2 6.3 3.4 4.5 4.8
Vietnam 6.2 5.2 5.4 6.0 6.7
Average 7.3 6.6 6.6 6.1 5.7

Source: WorldBank/Trading Economics


While the World Bank has lowered its forecast for global economic growth to 2.4%, frontier markets are easily poised to outpace other economies in terms of economic growth.


Consumer Confidence


Frontier markets in Asia generally have the highest level of consumer confidence.  Pakistan, Vietnam, and India were ranked as three of the top countries for consumer confidence among other frontier and emerging markets in Asia.  Other markets, such as Myanmar, Laos, and Cambodia delivered strong GDP growth of 6.5-7.0%, and although no data for consumer confidence was listed on Trading Economics, these markets are certainly strong markets for consumption.


Country Consumer Confidence
China 105.60
India 128.00
Indonesia 110.00
Japan 43.00
Europe -6.40
Malaysia 78.50
Pakistan 170.69
Philippines 2.50
South Korea 102.00
Taiwan 78.66
Thailand 74.20
Vietnam 144.80
USA 91.20

Source: Trading Economics


Health Expenditure Per Capita


Markets with low health expenditure per capita are also strategic areas for investment, as the country’s pharmaceutical and healthcare industries continue to develop through increased expenditure from the rising middle classes.  India is an interesting outlier to note since its expenditure falls below some of these frontier markets, and its biotechnology industry is prestigious in terms of its quality and relatively low cost.


Country Health Expenditure Per Capita(USD)
Bangladesh 31
Cambodia 61
China 420
India 75
Indonesia 99
Japan 3,703
South Korea 2,060
Laos 33
Malaysia 456
Mongolia 195
Myanmar 20
Nepal 40
Pakistan 36
Sri Lanka 127
Vietnam 142

Source: WorldBank


Inflation: What’s Working?


Another investors’ confidence sign for frontier markets is when inflation begins to drop from its double-digit highs to a new, stable level.  Other global frontier markets, such as Nigeria and Argentina, are struggling drastically with extremely high inflation rates.


Country Inflation
Cambodia 3.04%
Bangladesh 5.53%
Laos 1.85%
Nepal 8.60%
Mongolia 0.10%
Myanmar 10.06%
Pakistan 3.88%
South Korea 1.20%
Sri Lanka 3.90%
Thailand 0.38%
Vietnam 3.34%
Kuwait 2.90%
Argentina 40.50%
Nigeria 17.60%
Morocco 1.60%

Source: Trading Economics(Most Recent)


Some of the most notable improvements for inflation in various frontier markets include the following:

  • Vietnam’s inflation has recovered from its record high of 28% in 2008, to its current level of 3.3%
  • Laos’ inflation has also dropped to 1.85%, from its high of nearly 10% in 2011
  • Mongolia’s inflation has dropped to 0.1%, and was nearly 15% during 2014.

Corporate Taxes


Another added bonus for some frontier markets in Asia is the relatively lower corporate tax rates, which is one of many catalysts that results in companies shifting production to these countries.  A classic example I often cover on here is the shift of manufacturing from China to Vietnam, partially because Vietnam’s corporate tax rate is 5% lower.


Country Corporate Tax Rate
Bangladesh 25%
Cambodia 20%
China 25%
India 34.6%
Korea 24.2%
Laos 24%
Mongolia 25%
Nepal 29.5%
Pakistan 32%
Philippines 30%
Sri Lanka 15%
Taiwan 17%
Thailand 20%
Vietnam 20%
Asia Average 22%
Global Average 23.6%

Source:KPMG/Trading Economics/Multpl


Ease of Doing Business


Vietnam is ranked as one of the top frontier markets, apart from Mongolia, for ease of doing business.  I feel somewhat skeptical about Mongolia’s higher ranking, although I am very optimistic about how the government has been wisely handling mining disputes this year.  Overall, it can easily be stated that the ease of doing business is one clear-cut area where emerging Asia can prevail over other frontier markets.


Country Ease of Doing Business Ranking
Singapore 1
Korea 4
Hong Kong 5
Taiwan 11
Japan 34
Thailand 49
Mongolia 56
China 84
Vietnam 90
Nepal 99
Sri Lanka 107
Cambodia 127
India 130
Laos 134
Pakistan 138
Myanmar 167
Bangladesh 174



Buy Frontier/Sell Emerging


Frontier markets are substantially outperforming  the majority of emerging markets in terms of economic growth, have much more favorable demographics and growth potential, and these markets’ stock market discount should consequently be taken advantage of.  The greater fortune may very well be present for investors that buy into these discounted markets earlier when growth is strong.

For some of the perks of buying in long before a market receives its emerging market upgrade, check out the stellar growth of Pakistan’s stock market in the past 20 years.

South Korea’s stock market has come a long way since 1980, when its GDP was only $65.2 billion.The next part of this insight will focus on some of the best investment themes to capture domestic consumption from the “bottom of the pyramid” in frontier markets, as well as providing justification for an overweight in India for emerging market investors.


Stock Markets

I have excluded markets such as Cambodia, Laos, and Myanmar which currently only have between 3-5 stocks listed on their exchanges, thus making Bangladesh, Vietnam, Pakistan, and Sri Lanka the best frontier markets for accessing listed equity.  I have also excluded Mongolia because its market capitalization is relatively smaller(around $669 million) and I prefer mining companies listed on other exchanges, and have also excluded Nepal.

Country Stock Market Capitalization Stock Market Capitalization/GDP
Bangladesh $75.5 billion 38.7%
Pakistan $74 billion 27.4%
Sri Lanka $19.3 billion 23.4%
Vietnam $75.3 billion 38.9%
South Korea $1.37 Trillion 99.5%
Thailand $409.9 billion 103.7%
India $1.7 Trillion 82.0%

Source: Trading Economics/Various Stock Exchanges

The average stock market capitalization for these four frontier markets is only 14.9% of Thailand’s stock market capitalization, a major feat considering Vietnam, Pakistan, and Bangladesh all have substantially larger populations.  Another interesting trend to note is that these markets’ stock market capitalization/GDP is significantly lower than other emerging Asian peers.

Comparison with MNC’s

It is even more interesting to note that most of these frontier market’s total stock market capitalization even lags behind some multinational corporations.

Constituent Market Capitalization
Netflix $43.5 Billion
Procter and Gamble $236.1 Billion
McDonald’s $97.4 Billion
Starbucks $77.9 Billion
IBM $147.6 Billion
Combined MC for Sri Lanka, Vietnam, Pakistan, and Bangladesh $244.1 billion

Is Starbucks really worth more than Vietnam’s entire stock market? Is McDonald’s really worth more than Pakistan’s stock market, and is Netflix(trading at over 300 P/E) really worth twice as much as Sri Lanka’s stock market? When we take into account the strong trends of growth present in these frontier markets and the lower market cap/GDP for frontier markets, it is clear to see the potential for these markets is being relegated, and that these markets are a safe bet moving forward.  Proctor & Gamble’s stock market capitalization is nearly the same as the combined stock market capitalization of Sri Lanka, Vietnam, Pakistan, and Bangladesh.

A 2014 article from The Economist notes how some emerging stock markets were worth the same as some multinational corporations ( Mexico=IBM).

Source: The Economist

Moving forward, I have more faith in the simple growth story of the rising middle class in frontier Asia.

Vietnam’s Stock Market

I rank Vietnam as the most favorable frontier market due to its comparatively favorable demographics, lower GDP per capita, comparatively stronger economic growth, high consumer confidence, improved inflation, ease of doing business, and lower corporate tax rate.  Vietnam currently trades at over 16X P/E, which is a premium to MSCI Emerging Markets.  This, coupled with the country’s relatively high level of debt and need to implement more credible privatization efforts, are my main short term concerns with the market at the moment.  The following 20 investment themes in Vietnam have strong potential: Pharmaceutical Manufacturing, Textile Manufacturing, Food and Beverage Producers, Automotive Industry(various segments), Industrial Parks, Real Estate, Logistics, Oil and Gas, Steel Production, Banks, Brokerages, Seafood Companies,  Education, Rubber Exporters, Plastic Manufacturing, Retail Companies, Animal Feed/Livestock, Furniture Producers, Tourism, and Non-Life Insurance.  At the moment, the premium is somewhat justifiable and it is easily possible to construct a portfolio with lower valuation.

Pakistan’s Stock Market: Investment Themes

Pakistan is ranked as my 2nd choice for frontier markets, based on the long-term outlook for the country, as well as the immediate catalysts that are in place for the market.  Pakistan’s P/E was 10.77 as of the end of September 2016, and its P/E has the potential to rise to 12-13 due to its recent emerging market upgrade announcement for 2017.

Some positive outliers for this market include the following:

  • Favorable Demographics: Over half of the country’s population is currently under 24 years old, which provides long-term opportunity for increased consumption.  The country’s median age is currently 23.4.
  • GDP:  Pakistan’s GDP(269.97 Billion USD) is the highest among other frontier markets that I observed, and the country is a key global contributor for many sectors (sugar, textiles, cement, etc.).
  • Population: The country’s population(188.0 million) was the highest among all frontier markets that I observed.
  • Consumption: Pakistan had the highest consumer confidence among all markets observed.

Some less favorable factors for this country include the following:

  • Slower Growth: Economic growth between 2011 and 2015 was slightly below 4%, significantly lagging behind all of the previously mentioned frontier markets.  However, the IMF projects that the country’s GDP growth will reach 4.5% and 4.7% in 2016 and 2017.
  • Ease of Doing Business: Pakistan only ranked above Myanmar and Bangladesh for the country’s ease of doing business.  Political risks from terrorism lower foreign investors’ confidence for this region.

Some strong investment themes for the country that I have previously covered include the following:

  • Banks: There is still very low penetration for this market, and the Global Findex Database ranks the country as the lowest for financial inclusion in South Asia.  Only roughly 13% of the population currently has a bank account.
  • Textile Companies: Another strong component of the economy, which employs around 30% of its population.  Growth for textile exports, along with exports in general, has been sluggish, with textile exports most recently declining by 2% YoY.
  • Pharmaceutical Manufacturers: Pakistan’s large economy, coupled with its increasing birth rates, is resulting in an increased demand for pharmaceutical products.  This industry achieved growth of 12%in 2015.
  • Hospitals: As previously noted, Pakistan’s healthcare expenditure per capita significantly lags behind frontier and emerging Asia, which presents a strong opportunity for investment in listed hospitals.  Shifa International Hospitals currently trades at 22.9 P/E, quite a bargain, given the higher valuation in emerging markets such as Thailand.
  • Automotive Distributors: Pakistan’s automotive industry has been delivering double-digit growth amid slowdowns in other emerging markets, and the penetration rate for vehicles in Pakistan is still very low.

Bangladesh Themes

Bangladesh is another significant frontier market to note, with strong trends of economic growth, and the largest stock market capitalization out of the previously mentioned frontier markets.

Some positive outliers for this market include the following:

  • Demographics: Nearly half of the population is under 24 years old, and the median age is currently 26.3, a strategic area for strong consumption.
  • GDP Per Capita: The country’s GDP per capita lags behind other frontier markets such as Vietnam, Sri Lanka, and Pakistan.
  • Population: The country’s population of over 160 million was the 2nd highest among all frontier markets, only falling behind Pakistan.
  • Growth: Bangladesh’s GDP growth was consistently above 6% between 2011-2015.

The only main concern I noted was that the country ranked 174 for ease of doing business, and its relatively higher inflation of 5.5%.  Since gaining its independence in 1971, the country has increased its real per capita income by more than 130% and cut its poverty by more than half.  Around 1/3 of the population currently lives below the poverty line.

Some of the top investment themes to capture the country’s rapid economic growth include pharmaceutical companies and FMCG companies.  On top of this, the country has a strategic standing in the global textile industry due to its comparatively lower wages, and this is also a crucial industry for investment.  Some of the most noteworthy and largest companies in these sectors include the following:

  • Singer Bangladesh Ltd.: Manufacturer and marketer of consumer electronics, home appliances, and furniture.
  • Olympic Industries Ltd: The largest manufacturer, marketer, and distributor of biscuits in Bangladesh.
  • Argon Denims: A denim producer, which exports its products to Europe, USA, Canada, Australia, and Japan.
  • Beximco Pharmaceuticals: This company received FDA approval for a blood pressure drug last year.

Sri Lanka

Sri Lanka is another intriguing frontier, which has been struggling with a slowdown in exports and its high debt. The government’s Debt/GDP was 76% as of 2015, and the country has required a $1.5 billion loan from the IMF.

Overall the market has some positive traits, but is not a stellar destination for investment like other markets:

  • Demographics: Demographics are somewhat favorable for this market, with nearly 40% of its population under 24 years old, and the median age being 32.5.  The strong rise of the country’s aged population in the future is another positive trend to note for the rise of healthcare spending in the future.
  • Population/GDP: The country’s population is only slightly over 20 million and its GDP is only around 82 Billion USD, around 42% of Vietnam’s GDP.
  • Growth: The country’s economic growth has declined from its peak of over 8% in 2011, to its current level of 2.6%.

Sri Lanka’s economy is currently troubled by high debt, and its trends of economic growth are modest at the moment.  Nevertheless, there are a large number of interesting growth stocks in the country, which have been able to outpace the country’s economic growth.  Some of the following stocks have significant market shares in areas that are able to access the country’s rising domestic consumption, thus offsetting some of the risk associated with investing in Sri Lanka:

  • Lanka Hospitals: A private hospital operator in Sri Lanka.
  • Ceylon Tobacco: This company is the only legal producer of tobacco in Sri Lanka, dominating the majority of the market.
  • Dialog Axiata: Sri Lanka’s largest telecommunications provider.
  • Hemas Holdings PLC: A conglomerate, which primarily operates in FMCG and healthcare.
  • Lion Brewery Ceylon: A brewery whose products include lagers, stouts, and Carlsberg products.

A Closer Look at Excluded Frontier Markets: Future Outlook

Some frontier stock markets that I initially excluded may be worth looking into in the future, and some of these economies are also significant positive outliers despite having negligent stock markets.

Mongolia: I am optimistic about this market, but prefer mining companies that are listed on exchanges in Hong Kong, Australia, and Canada.  The country’s Oyu Tolgoi mining project is projected to contribute to 1/3 of the country’s GDP when in full production in 2021, which has rightfully termed the country as “Minegolia”.  Recent improvements included a newly elected government that is much more pro-foreign investment, the resolution of a mining dispute with Khan Resources, and the confirmation of Oyu Tolgoi.  I could see another mining boom happening in the 2020s when Oyu Tolgoi goes into full production.

Nepal: Nepal’s stock market is another to watch in the future, with a total market capitalization of approximately $19.6 billion. Nepal was the slowest growing frontier market out of all the markets I observed, with annual GDP growth only reaching 3.4% during 2015.

Laos: Laos has very strong demographics, with over 55% of the population being under 24 years old, and a median age of 22 years old.  The market’s GDP growth consistently exceeded 7% between 2011 and 2015, and inflation has dropped to 1.97%.  The only issue I have with the market is the small size of its economy($12.33 Billion GDP), and especially the lack of offerings on its stock market.  There are currently only five companies listed on its stock exchange, which including the following: a bank, an electricity company, a property service company, a petroleum company, and a construction/home improvements company.

Myanmar:  Myanmar is another intriguing frontier market, which has just launched its stock market, and currently only has 3 companies listed.  Myanmar also has strong youth demographics, with a median age of 28.6, and its GDP growth averaged at around 7% between 2011 and 2015.  The Asian Development Bank is predicting that growth will remain over 8% during the next two years.  A large number of companies have been flocking in for private equity deals in the FMCG Sector (breweries, toothpaste, etc.).

Cambodia: Cambodia has also been leading frontier markets in terms of economic growth, with its average annual GDP growth exceeding 7% between 2011-2015.  Demographics are also stellar; over 50% of the country’s population is under 24 years old, and the country’s median age is 24.9.  However, the company’s stock market currently only offers three options for foreign investors.

Top Frontiers

Laos, Myanmar, and Cambodia are still very intriguing for their economic growth and demographics, which are all poised to create an environment for greater consumption in the future when the country’s median age rise to the upper 20s.  Accessing the FMCG through private equity seems like the most appropriate play, although I prefer the simplicity of large frontier markets which produce a flurry of blindingly obvious trades.  Mongolia should still represent a small/long term/high-risk section of a portfolio, for investors willing to hold through the 2020s when the country is poised to potentially have another mining boom.

The collective GDP for all five of these markets is approximately $128 billion, with nearly half of this coming from Myanmar; this total amount still lags significantly behind Vietnam’s GDP of $193.6 billion. Moreover, the combined population is only approximately 107.7 million, compared to 188.9 million and 160.9 million for Pakistan and Bangladesh, respectively.  This fact, coupled with the country’s smaller stock markets, creates an investment case for frontier Asia which primarily focuses on Vietnam, Pakistan, Bangladesh, and Sri Lanka.

India: An Emerging Outlier

India is also another strong emerging market outlier to examine, which has many similarities to other frontier markets.  The market trades at a discount to emerging markets like Thailand and Malaysia, which are both delivering comparatively slower economic growth.  Moreover, even a market like the Philippines, which grew by 7% during Q2 2016, currently trades at 27.7X P/E.  I think that the price is right for India, especially considering it is outpacing its emerging Asian peers in economic growth.

The icing on the cake for India though is that despite being such a large and developed market, there is still “the bottom of the pyramid” element present and the potential for increased consumption from this group.  Some of the previously mentioned statistics for the company were on par with other high growth/underdeveloped markets:

  • The country’s demographics are still favorable, with over 45% of the population being under 24 years old.  The country’s median age is 27.6.
  • India is the world’s 3rd largest economy(PPP), yet its GDP per capita is only $1,581.6, on par with other frontier markets.  The GDP per capita for Vietnam and Pakistan is $2,111.1 and $1,429.0 respectively.
  • India’s GDP growth was over 7% during 2014 and 2015, on par with other high growth frontier markets.
  • The country’s healthcare expenditure per capita was lower than Sri Lanka and Vietnam.

India still has much room for economic growth, similar to other frontier markets, and the obvious opportunity presented by its population and demographics further adds to its investment case.  Emerging market funds should be “overweight” in India.  I also think frontier funds should be overweight in (or at least increase holdings in) Pakistan and Vietnam while examining opportunities in Mongolia, Sri Lanka, and Bangladesh.  This will allow investors to most effectively capture the growth of the bottom of the pyramid, and to mitigate investment risk amid global economic uncertainty.

My Thoughts on Social Implications

Although I did not focus on this aspect in this insight, the bottom of the pyramid concept has very significant social themes, namely eradicating poverty through profit.  This can be joined by other factors such as microfinance (Grameen Bank Model) and social business, which were spearheaded by Dr. Muhamad Yunus from Bangladesh.  Frontier market investing can therefore not only be considered a profitable endeavor for investors, but also as a social, macroeconomic boost for these frontier markets.  On top of this, some frontier funds, such as Tundra Fonder and Vietnam Holding, utilize an ESG focus (environment, social, and governance) in their investments.   I also view finance and economics as having very promising potential to be an altruistic force for frontier markets and certainly believe investing can produce social value in frontier markets.  The combined impact is very intriguing and extremely leveraged.

Pakistan: Prepositioning for Emerging Market Upgrade

Since the announcement of its emerging market upgrade next year, Pakistan’ stock market has been rallying, and is poised to continue delivering high returns.  The KSE Index has returned over 20% YTD, and has ample room to continue on this track, as its emerging market status next year will result in higher valuation for the stock market.  My previous insight Top Industries for Investment as Pakistan Transitions to an Emerging Market outlines certain stocks and industries that stand out, and ambivalently recommends the Global X MSCI Pakistan ET(NYSE:PAK) as a means to gain access to Pakistan’s upside as this transition takes place.  Other significant events happening in this market include the following:

CPEC: The government recently approved tax concessions for two projects for the China Pakistan Economic Corridor(CPEC), which will result in tax exemption for the following Chinese companies: China State Construction Engineering Company and China Communication Construction Company.  Both companies are working on a section of the Lahore-Karachi Motorway and a section of the Karakoram Highway.

SME: The Pakistan Stock Exchange has announced that it will create a new SME Board, a significant area to monitor as SMEs drive Pakistan’s economy.

IMF: Pakistan is on track to receive its final installment from its 3 year loan from the IMF, and plans to cut its ties with the IMF after this.

Cement Consumption: Domestic consumption of cement is still displaying healthy growth, increasing by 12.38% YoY last month, and the continued initiation of the CPEC makes this a promising, high growth area for investment.  An area of concern includes the lack of growth in the country’s cement exports, as exports declined by 0.06% YoY last month.

Automotive Sales: Pakistan’s automotive industry has experienced a slowdown in sales, with sales growth declining by 12% YoY last month.  This was largely attributed to a seasonal slowdown(20-23% production loss due to a holiday), and Honda’s sales still grew by 10% MoM.  Pak Suzuki Motor has hiked its car prices by 3%, and may increase prices by another 2% this year.

Textile Exports: Pakistan’s textile exports declined by 4% YoY during July, mainly attributed to the 11% decline in non value added exports(value added products increased by 1%).  Within the value added sector, knitwear and bedwear increased by 38% and 10% respectively.  Several stocks in this sector, including Nishat Mills Ltd (NML PA) and Nishat Chunian Ltd (NCL PA) remain significantly discounted to the KSE Index.

LNG Terminal: Pakistan’s 2nd LNG terminal is expected to go into production in 2017, and will be able to reduce the country’s gas deficit by 30%.

Despite its small future weighting in the MSCI Emerging Markets Index, Pakistan remains a highly significant market, which has drastically outperforming its frontier and emerging market peers.  The market deserves a higher weighting in actively managed portfolios, and is a wise short term bet in the next year amid its emerging market upgrade.

Sri Lanka Updates

Sri Lanka is a very noteworthy frontier to investigate, primarily for its strategic geographical position in Asia.  I noted opportunities and risks in this market in Sri Lanka Is Intriguing: Initiating Coverage, and think that this market should be monitored for investment as it begins to receive a loan from the IMF.  The IMF has agreed to provide a $1.5 billion loan for Sri Lanka for the next three years, and Sri Lanka will be introducing a new inland revenue act, reform on VAT, and custom code in efforts to reduce its high debt. Another key issue Sri Lanka needs to address is the poor performance of some of its SOEs.  These efforts would be prove to beneficial in creating an economic turnaround for Sri Lanka, and allow it to leverage its key geographic advantage in Asia.  Sri Lanka also benefits from its strong geopolitical cooperation with China and India, which will allow new ports and other projects to be implemented in the country.

FDI Projects: 
There are a large number of projects underway, and China and India remain two of the most geopolitically aligned countries, which are highly active in trade and FDI.  One of the the most noteworthy projects underway is Port City Colombo, which is expected to draw $13 billion in FDI.  Japan has also confirmed that it will be funding the construction of an LRT system in Sri Lanka, which will eventually include an area of 75 kilometers.

Issues with Debts/Declining Exports: The country’s Public Debt/GDP has historically been extremely high(75-80%), and exports plunged by nearly 20% last year.  Exports declined by approximately 12% in May this year, which was mainly attributed to a slowdown in exports for textiles, tea, and rubber products.

Tourism Continues to Flourish: Tourist arrivals in Sri Lanka reached an all time high last month, increasing by 19.1% YoY.  Growth was mainly attributed to strong growth in visitors from China, and large contributions from tourists from Western Europe.

Another Industry to Investigate: Another noteworthy area for investment is Sri Lanka’s telecommunications industry.  Norges Bank has a large holding in Dialog Axiata PLC, which provides services for mobile operation, fixed telephony, broadband operation, and television operation.  The company provides its services to approximately 10.9 million customers in Sri Lanka.

Sri Lanka’s stock market has declined by 6.9% in the past year, and should be monitored for a turnaround in the future.

Vietnam Updates

The VN Index has returned  19.9% in the past year, making it a stellar outlier in frontier and emerging Asia.  Vietnam’s PER has been on the rise, well above MSCI Emerging Markets, yet the market is still trading at a significant discount to Emerging Asia.   FDI is continuing to soar in Vietnam(125% increase during Q1 2016), with nearly 72% of the country’s FDI targeting the manufacturing sector.  As always, I encourage a significant weighting in manufacturing stocks to mimic the trends of FDI, and also to invest in areas that are able to capture rapid trends of domestic consumption.  The following areas have been on my radar this month, which includes industry updates and some new interesting companies to note: Textile Manufacturing, Seafood Exports, Beverage Producers, Animal Feed and Livestock, and Pharmaceutical stocks.

  1. Textile Manufacturing

Vietnam’s textile exports increased a modest 5.1% during the first half of this year, the slowest growth rate experienced since 2010. Current tariffs on exports are between 10-17% until the potential TPP is ratified, and other frontier markets pose threats to Vietnam, particularly Bangladesh.  Bangladesh, the world’s 2nd largest garment producer, is one of the strongest frontier threats to examine in the future.  The country’s exports doubled between 2009-2013, and approximately 80% of its exports are garments.  Lower labour productivity in Vietnam is also another issue for this industry, which offsets the appeal of its comparatively lower wages, as Vietnam is one of three countries ranking the lowest in ASEAN for labour productivity.  These threats, coupled with the necessity for increased localization to be compliant with TPP, are major causes of the industry’s current low valuation(5-6 PER for some stocks).  Despite these challenges, a large portion of textile stocks in Vietnam have been consistently delivering double digit growth in net revenue and net income, and are significantly discounted to other stocks in Asia.  A long term bullish approach for select textile companies, which have concrete plans to increase production, is the best strategy to access this discounted industry.

In anticipation of increased demand from the potential TPP, a large number of domestically listed stocks have plans to increase the number of lines they operate.  I am most optimistic about Gilimex and TNG Investment and Trading JSC moving forward:

  • Gilimex:  Binh Thanh Import Export Production And Trade Jsc (GIL VN) announced that it would add two lines to its Binh Thanh Factory, two lines to its Thanh My Factory, and 8 lines to its Hue Factory this year.  The company also plans to add two more lines to its lampshades factory.  The company is also investing in a new factory in southern Vietnam, which is expected to begin operating in 2017.
  • TNG Investment and Trading JSC:  TNG Investment & Trading JSC (TNG VN)  plans to increase the number of lines that it operates from 202 in 2016 to 275 in 2020, and is also making initial strides to produce some of its own materials, although it still mainly relies on importing materials from various countries.

2. Seafood Exports

I previously outlined the recovery of Vietnam’s seafood exports in the insight Vietnam’s Seafood Industry Updates: Don’t Miss the Boat for This Wide Moat, and investors should also note the turnaround for shrimp exports in Vietnam.  Vietnam’s shrimp exports increased by 8% during Q1 2016, compared to the approximate 33% decline experienced in 2015.  Sao Ta Foods Jsc (FMC VN) is a noteworthy, high growth stock in the sector, which exports its products to Japan, EU, America, and South Korea.  Pangasius exporter Hung Vuong Corp (HVG VN) owns over 50% of this company, and the company currently only has 9.8% foreign ownership.  The company’s net revenue and net income are projected to increase by 16% and 17% respectively through 2018(weighted average from KIS and MSI), and it is currently trading at a significant discount to the VN Index.  Its PER is 5.32 and its PBR is 1.39.

3. Vietnam’s Beverage Producers

Apart from Vietnam Dairy Products Jsc (VNM VN), which received approval for the removal of its 49% foreign ownership limitation from the SSC, there are other undercovered stocks in this sector to note.  Despite having extremely low liquidity, several of these stocks have received significant investments from foreign institutional investors.  The potential listing of domestic beer producer Sabeco is also well worth noting as another means to gain access to Vietnam’s beverages industry.

  • I previously outlined Chuong Duong Beverages Jsc (SCD VN) as an interesting niche company in Vietnam’s beverages industry, which is most noted for its sarsaparilla beverage called Saxi.
  • Nafoods is another company to monitor in this industry.  The company produces approximately 80% of Vietnam’s condensed passion fruit juice, and is the world’s largest exporter of Gac Puree to the US market.  The company will be making considerable investments in its passion fruit plantations through 2018.

4. Animal Feed and Livestock

Investment in animal feed/livestock companies is another high growth trend for investors to examine in Vietnam.  Demand for Vietnam’s livestock feed has been increasing by 13-15% per year according to according to Vietnam Livestock Feed Association(VFA).  The demand for livestock feed is projected to reach 25-26 million tonnes by 2020, a far cry from the current level of approximately 19 million tonnes.  According to the Livestock Department, the quantity of meat consumption in Vietnam will achieve an average growth rate of 8.3% per annum through 2020.  Companies such as Hoa Phat Group Jsc (HPG VN) and Masan Group have been investing in these areas, as well as a flurry of other foreign companies.  Dabaco Corporation (DBC VN) is a significant pure play for both of these areas, with plans for increasing its livestock feeding mills to reach production of 1 million tonnes by 2019.  I outlined this company further in the insight Food Producers in Vietnam: Animal Feed/Canned Food/Seafood/Rice.

5. Pharmaceutical Stocks are on Fire

Stocks in Vietnam’s pharmaceutical sector have had stellar performance, and this sector is projected to continue delivering double digit growth through 2025 according to BMI Research.  Stocks in this sector have returned nearly 40% between January and August, compared to a similar VN Index gain of only 12%, which presents mild concerns for finding a proper entry point for valuation for some of these stocks.   Domesco Medical Import Export Jsc (DMC VN) has received shareholder approval to remove its foreign ownership limitation, which would be a major feat if the government approves this.  As I have outlined in my insight Vietnam’s Pharmaceutical Industry, this industry is an obvious choice for investment based on industry growth and low valuation for certain companies, yet the issues of low liquidity and lack of foreign room for shares offsets the appeal of investment.  Some of the other companies I previously mentioned only have thousands of shares trading daily, and other highly desired companies have full foreign ownership.  At the moment, the liquidity risk seems worthwhile, and investors should continue to monitor Domesco for increased foreign room in the future.

Mongolia Displays New Buy Signals for Foreign Investors

Mongolia, which can be considered one of Asia’s most vulnerable frontier markets, has been through a flurry of ups and downs during the past five years.  Once praised as the world’s fastest growing economy, economic growth has recently approached recession levels amid the commodity bear market, China’s economic slowdown, and the rapid drop in FDI experienced from the delay of Oyu Tolgoi, and other mining disputes.   Mongolia is a strong commodity export economy, and approximately 90% of these exports go to China, making it most vulnerable to the current commodity bear market and China’s economic slowdown.  Furthermore, its economic performance has been hindered by the unpredictable actions of the government, which has been another strong factor for driving away FDI.  The current economic landscape necessitates a shift in this previous anti-FDI attitude to avoid a recession, and notable improvements have already taken place this year, which will help improve Mongolia’s reputation for foreign investment.  Mongolia is heading in the right direction, based on events that have taken place in recent months, and now is a strong time to consider stocks that are in a bottoming out phase.

Recession Averted/Potential for 2nd Boom in 2020

Mongolia’s Annual GDP Growth expanded by 3.1% during the 1st quarter of 2016, quite a feat for this struggling economy.  There are currently no short term catalysts for growth for the country, when considering commodities and China’s future economic outlook, and lower growth projections are now being made for this year.  The World Bank has projected 0.8% growth for this year, and the IMF has projected 0.4% growth this year.  Optimism for Mongolia’s economic turnaround is not misplaced, but does certainly require one to take a futuristic view.  The main catalysts for Mongolia’s economy will not fully come into play until 2020-2021, when its Oyu Tolgoi Mine goes into production.  Rio Tinto, with its partners the Mongolian government and Turquoise Hill Resources, have approved the next phase of developing Oyu Tolgoi Copper and Gold Mine, which is a strong point of reconciliation for the country.  The development of this mine will begin in mid 2016, and first production is projected to take place in 2020.  This project is projected to contribute to 1/3 of the country’s GDP, and its implementation is a breath of fresh air for the country and foreign investors, as the previous three year delay has reduced investors’ confidence in Mongolia.  An important lesson from 2012 and 2013 is that it is not worthwhile to buy into Mongolia when growth is strong, as history has proven that Mongolia’s economic growth has not been stable.  Instead, I think the most worthwhile investment approach is to invest during dark times, when stocks have bottomed out, and to sell sometime after Oyu Tolgoi goes into full production in the 2020s.

Resolution of Disputes with Foreign Investors: Buy Signal

The government previously had a 7 year dispute with Khan Resources, a uranium miner in Mongolia, but has agreed to pay $70 million to this Toronto listed company.  The Mongolian government met with this company at a Canadian Mining Conference in Toronto, and resolved to pay this amount to the company to improve its image with foreign investors.  Khan Resources’ stock has responded very well to this new announcement, nearly doubling from its price in early March.

The resolution of this dispute can certainly be considered a macroeconomic boost for Mongolia’s economy, and a sign that the government is beginning to recognize the necessity of improving its image for investment.  FDI is a necessity at this point, and this resolution was perfectly timed, as it was coupled with the beginning of the Oyu Tolgoi Mining Project.

Another significant resolution to note occurred during early 2015, when Kincora Copper resolved a dispute with the Mongolian government, which was delaying its exploration efforts, and caused nearly $7 million impairment for its balance sheet.  This reconciliation creates a strong investment case for this company, which is active in Oyu Tolgoi, and recently announced a new merger on May the 25th.  This merger will allow it to utilize HPX’s typhoon technology, which is instrumental in the discovery and delineation of high grade orebodies present at Oyu Tolgoi.  Like several stocks active in this country, Kincora Copper’s stock price trades at a far cry from the levels of 2012 and 2013.

Positive Movement for Other Stocks

Since early March, a large number of stocks have delivered strong returns.

  • Xanadu Mine’s stock price increased from 0.10 on March the 1st, to its current price of 0.21.
  • Erdene Resource Development’s stock price increased from 0.17 on March the 1st, to its current price of 0.33.
  • Khan Resource’s stock price has increased from 0.44 to 0.86.

I previously mentioned these three companies in a Mongolia Investors’ Confidence Report, and all three of these companies have experienced positive stock price movement since March the 8th:

  • Mongolia Growth Group’s stock price has only increased by 2.6%.
  • Mongolian Mining Corporation’s stock price increased from 0.07 to 0.10.
  • Kincora Copper’s stock price increased from 0.02 to 0.04.

The positive movement for stocks in recent months displays all of these stocks’ correlation to economic and political events in Mongolia, thus solidifying the value of a top down investment approach for a diverse portfolio of stocks with significant operations in Mongolia.  An improved economic environment for Mongolia in the 2020’s would produce wonders for a large number of stocks, as the sell off has been strongly based on negative sentiment for Mongolia.  Events in recent months display that improvements are taking place in Mongolia, marking now as a strategic entry point for investors.

Mongolia is Analogous to Chile

The South Gobi is a relatively unexplored area compared to other copper belts, as it currently has had less than 6 years of foreign exploration.  Mongolia can be considered a virgin territory, relative to other strong copper producing countries such as Chile and Peru.  The untapped nature of Mongolia’s copper belts in the South Gobi is very similar to Chile in the 1970’s, making investment in this area a strong, futuristic trend to tap into.  Chile had very limited exploration during the 1970’s, but now operates approximately 100 exploration projects.   Kincora Copper is one of several stocks located in this strategic area of Mongolia, which is expected to be the world’s third largest copper mine, and is also joined by companies such as Xanadu Mines and Entree Gold.  This is a wonderful futuristic trend to buy into, for investors who have a time horizon of more than five years, as stock prices returning to 2012-2013 levels would produce bar none returns for investors who chose to invest now.

Buy During the Gloom, Sell During the Boom

The previous 2 year dispute over Oyu Tolgoi resulted in FDI collapsing from $4.4 billion to $0.5 billion between 2012-2014.  The country’s annual GDP growth consequently collapsed from its peak of over 15% in 2012, to its current level of 3.1%.  The approval of phase 2 of Oyu Tolgoi, which will start in mid 2016, can certainly serve as a catalyst for Mongolia’s 2nd economic boom, which should take place in 2020-2021.  The implication for stock returns that would occur amid a 2nd economic boom in Mongolia is very powerful for a large number of stocks with significant operations in Mongolia, and most specifically in Oyu Tolgoi.  Oyu Tolgoi is moving forward as planned, and the resolution of the government’s long dispute with Khan Resources has also resulted in a necessary improvement for Mongolia’s previous notorious anti-FDI attitude.  Stocks are following with positive movements due to these catalysts, and many still trade at far cries from the higher levels experienced during Mongolia’s economic peak.  Mongolia is appealing for very few investors, after the rapid declines experienced since 2012, which has left many investors rightfully cynical.  Mongolia does present a high level of risk for investors, yet the current situation presents strong opportunity due to the perceived risk being much higher than the actual risk.  Moreover, the untapped Oyu Tolgoi has the potential to be a very salient area for mining in the future once operational, and investing before stocks potentially boom provides the opportunity for bar none returns.

Those willing to give the country a 2nd chance, amid new political and economic improvements that will come into full fruition in 2020, have the potential for strong returns.  I retain my conviction for Mongolia as a small/high risk portion of a frontier market portfolio, and furthermore encourage investors to buy during dark times for the strongest upside.  The 2nd boom that will be driven by Oyu Tolgoi in the 2020’s is the opportune time to sell, not buy.  Significant improvements made in recent months further edify my conviction for the contrarian opportunity that Mongolia offers investors.

Sri Lanka is Intriguing: Areas to Consider for Value Investing

Opportunity Overview

The stock market discount and comparatively stronger trends of growth present in frontier Asia is intriguing, and a buy frontier, sell emerging approach is one of the most clear cut ways to prosper when investing in Asia. These trends, coupled with noteworthy political improvements, can be combined to create a strong value investing case. Sri Lanka is a strong frontier market in Asia that meets all of these requirements, yet is being relegated by many foreign investors. Sri Lanka has been benefiting from the end of the country’s 26 year civil war that ended in 2009, which has resulted in an improved political landscape.   This improvement has been coupled with Sri Lanka’s new government, which was elected in January 2015.

On top of this, the country has been experiencing rapid growth in consumption, and has some interesting investment opportunities found in areas such as banking, healthcare, tea exporting companies, construction, manufacturing, logistics, and consumer goods. The country of 21 million has comparatively lower wages, and a literacy rate of 92%, the highest in South Asia, and among the highest in Asia. However, the most salient, and overlooked opportunity, is the country’s strategic geographical placement on the Indian Ocean, allowing it to be strong economic center for logistics. This strategic benefit, will be modestly complemented by other strong trends, and allow Sri Lanka to eventually emerge as a salient asian market in the future.

Relegation of Sri Lanka’s Geographical Benefits

Sri Lanka is strategically located on the Indian Ocean, a few miles away from the East-West shipping port, where it is estimated that 60,000 ships pass each year, carrying 2/3 of the world’s oil and half of all container shipments. The country’s SAGT Terminal, is one of three terminals in Colombo Port, which handles shipments to India and other subcontinent countries. Transshipments from India account for approximately 75% of its shipments.  The other two ports are run by the government and Colombo International Container Terminals.

Sri Lanka SAGT Port

SAGT Port was ranked 4th for Global Productivity!  Source: Lanka Times

China has been spearheading investment in Sri Lanka, which has included highways, ports, and an airport in the south. China also wants to build a controversial $1.4 billion port city in Sri Lanka, and was recently given permission, after delays from this project due to protests. China has also identified the country as a key point on the maritime Silk Road, which will extend from China to Africa.

This strong attention from China has been balanced with significant FDI from India, which was reluctant after 2009 due to human rights concerns for the Tamil population in Sri Lanka, as India also has a large Tamil population in Tamil Nadu.  India seeks to be active in FDI in Sri Lanka, in order to compete with China, and to foster close relations with Sri Lanka, which is already a strong trade partner.

Stock Market

Sri Lanka Stock Market

Sri Lanka’s stock market has approximately 294 listed companies in 24 business sectors, with a market capitalization of around $18 billion. The appeal of its stock market is for a long term hold, as performance this year has not been stellar.

As with many frontier markets, it is simple to construct a portfolio with lower valuation, mainly by avoiding high valuation found in certain sections of the consumer discretionary sector, and identifying areas that have had a boom in earnings growth.  A target single digit P/E is certainly feasible for Sri Lanka.


Sri Lanka Inflation

Sri Lanka’s inflation most recently fell to 2%, a far cry from the higher levels experienced during 2012-2014.

Annual GDP Growth

sri lanka gpd growth.png

Sri Lanka’s economy is projected to grow by 5.6% annually through 2016-2020, driven strongly by tourism, tea exporting, logistics, IT, and construction. Sri Lanka’s economy already has a strong benchmark of growth, as annual GDP growth has averaged at 6.15% since 2003.

Consumer Spending

Sri Lanka Consumer Spending

Consumer Spending growth has been strong in Sri Lanka, making the appeal of value investing in this industry very strong. Tea exporting companies and distilleries are two noteworthy areas where valuation is particularly low.

Growth in the Tourism Industry

Sri Lanka’s tourism industry has much to offer, due to the end of the country’s Civil War in 2009, and tourist arrivals increased by 16% during 2015, with a notable 30% increase in tourists from India. Mark Mobius’s views on Sri Lanka’s tourism industry are very positive.

” The entire country is really a tourist haven. It has history, it has beautiful beaches, it has nice people and it’s small enough so you can see everything in a week or less”

The end of Sri Lanka’s Civil War in 2009 has served as a catalyst for the increased appeal of its tourism industry, and there is still ample room for growth ahead.

Healthcare Industry

Sri Lanka’s healthcare industry is an area for strong consideration, driven by the following advantages:

  • 9% of its population is currently over 65 years old, and this amount is likely to double by 2030 according to a rating by Fitch
  • Private Hospitals have achieved 21% CAGR in the past four years, compared to the public sector’s growth of 10%
  • 70% of the country’s population uses private hospitals
  • Health expenditure per capita in Sri Lanka is only $127, significantly lagging behind much of emerging Asia.

This area provides strong opportunity for growth in the future, and several listed private hospitals are available at reasonable valuation.

Industrial Production/Manufacturing

sri lanka industrial production

Sri Lanka’s industrial production has risen substantially, and the country’s manufacturing industry presents strong opportunities. Sri Lanka is poised to benefit more if it can join trade agreements, and bring in more FDI, as FDI currently only accounts for 2% of its GDP. Employment in the manufacturing sector is comparatively attractive, as workers can earn substantially more than working in the agriculture sector.  One particularly strong, high growth area is for tile manufacturers, as several stocks in this area have surged in earnings growth, and trade at very low valuation.

Banking Industry

The opportunity in Sri Lanka’s banking industry is also worth noting, as several listed banks traded at a strong discount to the CSE Index. NPLs historically averaged near 4.5% since 2010, and declined to 4.2% as of September 2015. The main threats for the increase of NPLs in the future include slowed economic growth, rising interest rates, and banks having exposure to SOEs in their assets.  In addition to low valuation, some banks in Sri Lanka can also be positively noted for high CAR, ROE, and profit margins. Sri Lanka is also a strong outlier in frontier Asia in terms of its high banked population, as around 83% of its population is already banked, yet other Asian frontier markets such as Bangladesh, Vietnam, and Pakistan can offer more in terms of growth, due to their comparatively lower banked population.

Areas of Concern

Overall we can clearly see strong trends of economic growth, low valuation and a consequent strong appeal for Sri Lanka’s stock market, as well as improvement of previous political and economic risks. The following areas of risk should be noted, although fundamentals are certainly strong enough to create a strong case for value investing.

  • Low Liquidity: A common challenge for any frontier market.
  • Debt: Sri Lanka’s Government Debt to GDP is 75.5%, notably higher than its frontier Asian peers. Sri Lanka requested a $1.5 billion loan from the IMF, and is also planning to sell $3 billion worth of bonds in global markets this year. The yield for Sri Lanka’s bonds has soared to 11.6%!
  • Corporate Tax Rate: Sri Lanka’s corporate tax rate is 28%, well above other attractive destinations such as Vietnam, which offer further incentives beyond the existing low 20% corporate tax rate.
  • SOEs: SOEs, which account for 18% of the country’s GDP, have been criticized for poor financial performance.
  • Trade Deficit: Sri Lanka’s trade deficit has averaged at -$457 million since 2003. The country’s main exports are textiles and tea, which both account for approximately 57% of its exports.


Sri Lanka has witnessed strong recovery on the political front, and its strategic geographical location and strong trends of growth both make it a strong futuristic investment destination in Asia.

The Dow Jones is a Catalyst for Misplaced Optimism

The Curious Recovery of the Dow Jones

After delivering stellar gains after America’s economic recovery in 2008, the Dow Jones Industrial Average has stalled, with a 1 year decline of 0.19%.   A further examination of the components of the Dow Jones, and most importantly how stronger performing components have replaced some of the sub par links, reveals that its strong benchmark of success after 2008 has been a catalyst for misplaced optimism for America’s stock market. Its current mediocre performance is further troublesome, as one can holistically examine a flurry of sell offs this year  in multiple sectors, such as the energy, biotechnology, and banking sectors. The Dow Jones stands as a misleading rosy shaded picture of how America, and most specifically its stock market, has recovered and continues to prevail.  Weak fundamentals can easily be seen by examining areas of America’s economy, particularly areas the middle class is most vulnerable to, as well as the stock price losses experienced in other crucial sectors of America’s economy.  A list of 30 companies is certainly too small of a sample size to holistically represent America’s stock market, yet I think the modifications and strategic exclusion of vulnerable areas makes the impact of its distortion of reality much stronger than one would initially assume.

9 Year Gain of the Dow Jones Industrial Average

Dow Jones 10 Year.png

Source: Macrotrends

QE is a Hoax

Quantitative easing, and America’s status as having the world’s reserve currency, has been correlated to the questionable recovery of America’s economy, and Wall Street has most certainly been an unnecessarily strong beneficiary of the Fed’s QE policies.  The Fed has nearly quintupled the monetary base since 2008, a severely relegated factor of consideration for those that still stand optimistic of the Fed’s policies.   The most relevant question is, how much further can you go after you have quintupled the monetary base?

monetary base

Even Alan Greenspan recently stated that monetary policy has reached the outward bounds of its effectiveness, without another round of quantitative easing, and that another QE would result in a higher P/E for America’s stock market.  Most recently the profit of  the S&P 500  declined to 9.8% in Q1 2016, the lowest level experienced since the financial crisis.  We can certainly see a flurry of companies that are beginning to fall on earnings growth, and further positive stock price movement would be troublesome, in terms of valuation.

Other Weak Fundamentals

While America continues to deliver moderate GDP growth, and records inflation at 0.9% , the impact on the American population post 2008 has certainly been adverse, and recession like impacts can be felt throughout America.  This can serve as an initial point of skepticism as to why the Dow Jones Industrial Average has curiously risen upwards, while other economic fundamentals post 2008 have become far worse.  This is not to mention America’s military industrial complex, which drives the government further into debt, and produces economic adversity for America’s population.  Government expenditure from tax revenue is not properly spent on crucial areas that would develop America’s economy and be altruistic for its population, including areas such as healthcare, education, and R&D.

fed damage

Of the above areas, the emergence of the student loan bubble post 2008 is most questionable and disturbing.  Student loans now comprise nearly 37% of the government’s  total assets.  The struggle of America’s population is labeled as an asset of the government, and a whopping portion of it.

Strategically Replacing Components: Skepticism is Befitting

Wall Street can be prosperous, while America’s middle class struggles.  This is by no means a new phenomenon, and is merely my starting point for skepticism.  What is most curious to note, is that Wall Street can begin to fail to be prosperous in multiple areas, yet produce the illusion of prosperity or neutrality, which can be seen in an in depth examination of the Dow Jones Industrial Average.

Wim Grommen’s article from 2014 entitled “The Dow Jones is Hoax” outlines one relevant concern with the Dow Jones Industrial Average, namely the replacing of weaker components with stronger stock picks.  The Dow Jones has made some very strategic modifications to its components in recent years, which can easily be classified as cherry picking to produce the illusion of greater success.  This modification of an existing small sample size is quite troublesome.

The Decline of Alcoa and Bank of America, Which are Now Excluded Components

During 2013, Alcoa, Bank of America, and Hewlett Packard were replaced with Goldman Sach’s, Nike, and Visa.  We can particularly see that Alcoa(AA) and Bank of America(BAC) have not recovered well since the 2008 crash, and that their exclusion from the average is misleading.

9 Year Decline of Alcoa and Bank of America

BAC and AA Decline

Source: Nasdaq

Addition of Nike and Visa, which are Positive Outliers

Meanwhile, Nike(NKE) and Visa(V) have fared very well post 2008, and the strategic addition of these stocks serves as a catalyst for misplaced optimism in the Dow Jones Industrial Average. The P/E for these two stocks in 27.6 and 28.9, well above the average for the Dow Jones Industrial Average.  The addition of these companies, coupled with the removal of Bank of America and Alcoa, unnecessarily elevated the success of the Dow Jones Industrial Average.

9 Year Gain of Nike and Visa


Nike:Visa 9 Year Gain

Source: Nasdaq

The combined addition of Nike and Visa, and the removal of Alcoa and Bank of America, distorts the reality of the Dow Jones Industrial Average.

Exclusion of America’s Greatest Thorns: Misplaced Optimism

These replacements are troublesome to note, as a modification for a small number of companies can have a strong impact on a sample size of 30 companies.  What is perhaps a greater source of skepticism for me is the exclusion of the following areas: biotechnology, oil and gas, and FANG stocks.

In addition to some of the replacements made, one can also grow skeptical by examining that the Dow Jones Industrial Average excludes crucial parts of America’s economy, which have been most salient in ongoing political discourse.  Beyond looked at fundamentals, one must take a behavioral economics approach on stock market price movement, and acknowledge that political sentiment is one of the greatest catalyst for herding.

Biotechnology companies have experienced a strong sell off amid recent political debates, and even Janet Yellen has been willing to criticize the biotechnology industry for price gouging and poor fundamentals. On top of this, banking profits have dropped to disappointing lows this quarter, and there have also been strong sell offs in the energy sector amid the declining price of oil. Yet these significant components of America’s stock market are not fully reflected in the Dow Jones, which further produces misplaced optimism.

Biotech: Bubble has been Popped from Political Sentiment

Nasdaq Biotech(BIB) has consequently taken quite a fall this year, and quite strangely, there are none of these components included in the Dow Jones Industrial Average.  Biotechnology has been one of the major sectors discussed in political debates, receiving criticism from multiple presidential candidates.

1 Year Decline of Nasdaq Biotechnology(BIB)

Nasdaq Biotech

Source: Nasdaq

Political sentiment finally drove the market to become rational, as seen by the strong sell off in the sector this year.

The Dow Jones Only Includes Pharmaceutical Manufacturers, Cleverly Evading this Thorn

The Dow Jones does include two pharmaceutical companies, Pfizer and Merck, which have had stable stock price movements amid the recent industry sell off.  Therefore, the Dow Jones does not fully reflect America’s economy, as it strategically evades the issues of the  biotechnology industry, by focusing on pharmaceutical manufacturers that have had stable stock price movements.  Moreover, the valuation for these pharmaceutical companies  is 30.0 and 36.3 respectively, making a drop in price plausible, and perhaps even befitting.

9 Year Price of Pfizer and Merck

pharm. 1 year

Source: Nasdaq

Both companies have delivered impressive gains post 2008, and a key point to note is that their price has been stable in the past year, while biotechnology stocks have been strongly sold off.


The oil sector is an obvious area where massive sell offs have been experienced, yet the substantial sell off in this area is excluded from the Dow Jones Industrial Average.  A flurry of investors have suffered greatly from investments in oil companies, with the only consequence the Dow Jones faces from this is indirect, namely the adverse performance of banks due to investments in this sector.  Exxon Mobil  and Chevron’s stock prices only declined by 16% and 20% in 2015, a far cry from the sell off experienced in this industry.

2 Year Decline of the iPath S&P GSCI Crude Oil TR ETN

2 Year Decline

Source: Nasdaq

An inclusion of some major oil companies in the Dow Jones Industrial Average would easily result in a major shift in its performance, yet the average evades this major thorn with relatively negligent stock prices declines from companies in this area.

The Exclusion of FANG Stocks

The Dow Jones excludes Facebook, Amazon, Netflix, and Google, a fact which should most certainly be assessed.  Unlike other previously mentioned Dow Jones components that experienced booms, such as Nike and Visa, the collective valuation for these companies is irrationally high.  Amazon and Netflix in particular were two of four stock credited for accounting for 95% of the gain for the S&P 500 Retailing Industry Group, amid the gloomy growth of retail retail sales in America.  The P/E for both of these companies is unacceptably high, which displays further distortion of indexes.  Facebook’s valuation is also very high, and even Google trades at a premium to the Dow Jones Industrial Average.

After delivering massive gains post 2008, the collective P/E for these four companies is currently 238.7.  If these components were included in the Dow Jones Industrial Average, it would raise the P/E to approximately 50.2, a far cry from its current level.  The exclusion of FANG stocks produces the illusion that massive stock price gains in America can be coupled with reasonable valuation and earnings growth.  Amid the recent record drop in corporate earnings, investors should be cautious of positive stock price movement that is not coupled with earnings growth.

Sociocultural Angst Against Multinational Corporations

The negative political sentiment for banks and biotechnology companies has already resulted in a strong sell off in the past year.  On top of this, the recent controversy of the Panama Papers can certainly serve as an increased catalyst for heightened political disapproval for multinational corporations evading taxes through their offshore practices, although sociocultural disapproval has already been strong in the past year.  Similar to what we have seen in other industries, we could also see a strong sell off for a large number of multinational corporations if this political discontent continues, which would make the Dow Jones Industrial Average most vulnerable to a sell off.

Investment Banking Sell Off: No Free Lunch

Unfortunately, the Dow Jones is not able to cleverly evade all of America’s thorns, as seen by its exposure to the banking sector. Goldman Sachs was introduced into the Dow Jones Industrial Average in 2013, and has witnessed a strong decline in its stock price in the past year, while other components have cross subsidized with strong, and most likely unsustainable, stock price gains.

gs 1 year

Source: Nasdaq

Goldman Sachs stock price has experienced a substantial sell off in the past year, and the company’s poor financial performance this quarter can further elevate the decline of its stock price.  Its profit declined by 56% this quarter, and other banks have recorded strong losses as well.  This poor news comes at most unfavorable timing, as many companies in this sector have already witnessed a strong sell off, and the sector is highly vulnerable to political criticism.  Poor financial performance, coupled with increased political discontent with the reckless behavior of investment banking, can all serve as catalysts for a continued sell off in this sector.

Misplaced Optimism

The Dow Jones boom is ending, and currently standing at a neutral point, the Dow Jones still in many ways misleads Americans as to how its stock market is performing.  Strategic cherry picking has still resulted in a small loss this year.  For a true, deeper picture of America’s economy and stock market, one must dive deep into investigating individual sectors, and come up with a conclusion in this manner.  Fundamentals become increasingly important during dark times, and it is essential to look at fundamentals such as financial growth and valuation when making investment decisions, and to not be misguided by general bullish sentiment.  I see darkness down the line.