With the US and the UK leading the world's vaccination drive, expectations are that developed markets will be the first economies to rebound, with emerging markets lagging behind, says Deirdre Maher.

Save for China and a handful of Southeast Asian countries - seen as some of the ‘winners' of the crisis - emerging nations are expected to suffer more from the lockdowns and slow administration of vaccines, and will take longer to return to their pre-crisis levels.

But the reality is that if you look further afield within the emerging universe, there are some countries that have not only weathered the storm but are also benefitting from structural growth stories that have been years in the making. China has not been the only growth story in the region: Vietnam and Kazakhstan are two standout cases that deserve investors' attention.

Supported by China's recovery, the development around the New Silk Road theme, as well as long-term growth in global trade, frontier markets present some promising investment opportunities in the medium term.

With strong economic footing, strategic geographical positioning, and nascent capital markets, these two economies in particular are the perfect destinations for investors looking to tap into early-stage, long-term growth. Let us first consider the macroeconomic backdrop.

In Vietnam, we have seen the emergence of a classic EM structural growth potential in the form of demographic dividend, urbanisation, and a growing middle class.

This is underpinned by solid political stability, which has made Vietnam an attractive FDI destination over the past number of years, with the country positioning itself as a key supply chain shift beneficiary, particularly at a time when companies seek to reduce country-specific risk by diversifying their supply chains

Vietnam is also an ideal export base due to its relative cost advantages as compared with other countries in the region, its large labour pool, geographic proximity to key markets, and supportive government policies.

The macro landscape in Kazakhstan is equally promising, particularly due to its strategic importance to the New Silk Road initiative and its location at the centre of the Eurasian Land Belt - the 8000-mile overland route stretching from China and the Far-East of Russia, to Europe in the West.

Kazakhstan is benefiting heavily from Belt and Roadinvestment, with data in 2019 showing 55 projects to have received Chinese Silk Road investment to the tune of USD27.6bn.

These investments, alongside its innate reform story, have helped revitalise the Kazakh economy over the past number of years.

Both Kazakhstan and Vietnam are, therefore, on strong footing when it comes to realising future growth. What, then, is the outlook for these markets?

In the case of Vietnam - one of the few countries to finish 2020 on a positive note, delivering +2.5% GDP growth - a target of +6.5% has been set by the government for 2021.

Vietnam's rural/urban split mimics that of China 20 years ago, and it is expected that similar consumer trends will continue to play out.

Spending is also set to rise, especially in infrastructure, with the Ministry of Planning and Investment setting a public investment budget of USD119bn over the next four years.

It is also now fair to say that Vietnam's attractiveness to foreign companies has moved beyond its proximity to China. While its location is still important, it is now only one part of the narrative, with Vietnam's home-grown economic growth engine making it an attractive investment destination in its own right.

In comparison to Vietnam, Kazakhstan faced a slightly more challenging 2020, where GDP contracted -2.5% due to the twin impacts of Covid-19 and a sharp fall in the oil price.

Despite this, the IMF is forecasting +3% GDP growth for this year on the back of improved global growth outlook, increased exports, and stronger domestic demand. And with the global recovery, Kazakhstan should stand to benefit from higher commodity prices.

In the medium term, our positive outlook is supported by the government's efforts to improve the business climate and its positioning as an infrastructure investment beneficiary.

So, with such attractive outlooks, what is the best way for investors to tap into these two exciting growth stories?

On the whole, Vietnam's positive rate gap and increased liquidity are supportive for its equity market. Equities are reasonably valued with a price to earnings ratio of 17.3x p/e, particularly relative to regional peers.

Although the FX rate appears expensive, it is underpinned by healthy FX reserves, low external debt, and vibrant exports with a current account surplus.

From a bottom-up perspective, Vietnam's listed stocks are broadly seeing market share gains, have strong balance sheets, and are enjoying robust growth.

The Vietnamese equity market also has a good breadth of sectors which is in contrast to many other Small Frontier and EM markets, and the strong domestic retail participation in the market helps ensure relatively strong liquidity.

An emerging market index upgrade could also be on the cards for Vietnam. The country meets the quantitative thresholds for an upgrade, such as the presence of large stocks and trading volumes, but lacks certain qualitative criteria, particularly around issues of foreign exchange liberalisation and openness to foreign investment. But any announcement of a move to MSCI's EM Index watchlist, or upgrade itself could be a definite catalyst for the market.

In the short-term, Vietnam must tackle the recent emergence of a fourth Covid-19 wave. However, the country is employing the same tactics that were successful across the previous three outbreaks, with the current wave unlikely to harm Vietnam's long-term growth potential.

While the listed equity opportunities are limited in comparison to Vietnam, Kazakhstan has an ambitious privatisation programme with the state earmarking stakes in 170 companies for divestment, some of which are expected to be done via IPO, offering up more opportunities for investors to participate in the country's growth.

Today, Kazakhstan is one of the top macro stories in the CIS equity space. Kazakh equities are undemanding on both an absolute and relative basis, and we are invested in a number of opportunities that we are scoping for re-rating.

We also like the country on the local currency front and it is a potential candidate for GBI-EM Index inclusion.

As with Vietnam, therefore, we hold a positive stance on Kazakhstan and will continue to scout further investment opportunities in the coming years.

Many investors are not aware that more than 85% of MSCI EM is now concentrated in 8 countries… and the remaining 15% spread across 19 other countries, indicating that there are a wealth of overlooked and under-invested stories in smaller Emerging Markets and also Frontier countries, such as Vietnam and Kazakhstan, that can both add diversification and deliver returns as the world tries to recover from the Covid crisis.

By Deirdre Maher, head of frontier markets, Amundi

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