Amid heightened market volatility and uncertainty, Rory Kutisker-Jacobson explains how a disciplined, valuation-driven approach helps distinguish genuine value from value traps, uncovering attractive investment opportunities across frontier markets despite prevailing market pessimism.
Periods of heightened volatility and investor uncertainty present a particularly fertile hunting ground for patient, valuation-driven investors in frontier markets. These markets are often overlooked or poorly researched by global investors, resulting in significant pricing inefficiencies and, at times, compelling opportunities. While short-term volatility can be pronounced, our experience suggests that market dislocations frequently create attractive entry points for long-term investors willing to tolerate uncertainty.
For the quarter, market performance across frontier countries was uneven, reflecting the differing domestic economic conditions, political developments, currency movements and shifts in investor sentiment. Rather than attempting to predict these outcomes, we continue to do what we have always done: focus on assessing individual businesses and the prices at which they are traded. When the market presents us with an opportunity to buy a good business at a large discount, we pounce on it. We believe that, over time, the price one pays and company fundamentals are far more important in determining investment returns than short-term fluctuations in economic expectations and investor sentiment.
Indonesia provides an apt example. It has been one of the weakest performing frontier and emerging markets so far this year, with the Jakarta Composite Index down 39% in US dollars. Foreign investors have been net sellers of Indonesian equities amid concerns over fiscal policy, governance issues, a weakening rupiah and questions around policy predictability under President Prabowo Subianto’s administration. Market selling appears widespread and indiscriminate, with little distinction being made between companies with differing fundamentals. As such, we have increased our focus on the country and written several internal research reports on potential opportunities.
Deeper research suggests that many of these counters are not as attractive as we thought at first glance and the price declines may indeed be justified. You rarely find diamonds without digging, however, and despite rejecting some of the ideas, we found one compelling opportunity and made our first investment in the country in June. Indofood Sukses Makmur (INDF) is an integrated consumer-facing holding company, with its primary asset being the listed subsidiary, Indofood CBP (ICBP). ICBP is the leading instant noodle business in the country, with more than 70% share of the domestic market and a considerable presence in offshore markets. Beyond an 80.5% stake in ICBP, INDF owns wheat flour, palm oil and distribution businesses that vertically integrate with and supply ICBP. On our estimates, INDF trades on just over five times earnings, which we believe is a good price to pay for a dominant, cash-generative, consumer-facing business.
Outside of Indonesia, the underlying fundamentals of the companies already held in the Allan Gray Frontier Markets Equity Fund generally proved more resilient than market sentiment. During the quarter, we added to existing positions as volatility or continued depressed pricing created opportunities. We also initiated small positions in Mexico, Poland and Türkiye. Conversely, Seplat Energy, a Nigerian energy provider, has delivered strong share price performance year to date on the back of elevated oil prices, and we utilised this opportunity to trim the position.
The portfolio continues to trade at what we believe is a substantial discount to our estimate of underlying intrinsic value. While we cannot predict when this discount will close, history suggests that patient investors are ultimately rewarded when fundamentals assert themselves. In the meantime, we remain committed to investing where prospective long-term returns justify the risks involved, irrespective of prevailing market sentiment.