Attractive yields with bonds from Ecuador, Surinam and Papua New Guinea – how can one achieve that?

All three countries belong to the so-called frontier markets, i.e. they are on the verge of becoming emerging markets. The term usually goes hand in hand with robust growth potential, a strong drive for reform and low valuations. This offers interesting investment opportunities for expert investors and active managers. As contrarian investors and early movers, we in the Emerging Markets Team at MainFirst not only observe emerging markets such as Brazil, China and India, but also frontier markets such as Surinam, Papua New Guinea and Ecuador – and their growth potential.

Detailed observation of promising frontier markets
For us, it is interesting to know that the number of tourists visiting the Galapagos Islands has increased significantly, as this means that there is a greater flow of passengers through the airport in Quito and the investment in its expansion has upside potential. Of course, this is just one indicator that leads us to take a closer look. We would never base our decisions on just one factor. Rather, we always invest on the basis of a holistic approach where the political situation, the country's natural resources and many other components play a role.
Consequently, in Ecuador, in addition to the increase in tourism, we see the country as rich in commodities. At the same time, we note that President Lenin Moreno has been working hard to attract investment into the country since he took office almost two years ago, especially in the area of mining, and oil production is also on the rise. All these developments also increase the number of air passengers. And Quito is the main hub for flights within the country – not only for tourism to the Galapagos Islands, but also to the mines and other extraction sites. This makes a company like Quiport, which successfully operates the only airport in Quito, that it has rebuilt and now further optimized and expanded, an interesting investment opportunity. If the figures of such a company corroborate the positive overall indicators, we are likely to take its bonds into our portfolio.

Another South American frontier market we keep an eye on is Surinam. Similar to Luxembourg, Surinam has around 600,000 inhabitants – but the country is almost as big as Estonia, Latvia and Lithuania combined. Surinam's main sources of income are the gold mine and oil, given the country's high reserves of raw materials. Since the discovery of additional oil fields off the coast, its growth potential has multiplied. On the other side of the world, we are analysing a similar case, that of Papua New Guinea. Here, too, there are extensive deposits of raw materials, a sufficiently stable political system and plenty of potential for growth. Especially since a large gas field was discovered off its coast, which is currently being developed. As a result, the country's revenues will rise considerably and its debt is projected to fall sharply. The government bonds of both countries thus offer interesting upside and long-term growth potential. 

Identify opportunities early and move in
In our search for interesting investment opportunities, we often observe companies well before they go public, and then invest in them before many others have even heard of them. In Moldova, we have long been in talks with Trans-Oil, the only producer of sunflower oil. The company attracted our attention with its interesting and solid business case. During our observation period, we were able to directly witness how well thought-out project plans were successfully implemented. Trans-Oil's business model is not to own fields, but to buy their products from the surrounding farmers, process them and export them from their own ports. Thus, they have low storage costs and are well hedged. Plans are currently being implemented to further expand the production chain, build silos and expand the port. In the last 12 months Trans-Oil has achieved an EBITA increase of 15 percent and our analysis shows that the new development plans are very realistic.

We are also looking at companies in Georgia. The country itself has grown steadily in recent years and has carried out many structural reforms that have helped the economy and the population to become richer. Georgia Capital, for example, specializes in providing capital to promising companies so as to help accelerate their growth. Another interesting company is Silknet, the second largest telecommunications provider. Here, too, we see interesting upside potential.

Our research shows us time and again that those who look carefully will find attractive investment opportunities if they have the necessary expertise to identify them. Meaning that places like the Galapagos Islands offer special riches on many levels.