A decade ago, global investors hardly ever invested in countries such as China, Brazil and India. Today, those very global investors who have not invested in these emerging giants feel like they are letting the hottest money-making opportunities pass them by. Yet, as India and China have become an everyday issue for global investors, there are a group of countries that attract the true Adventurers of the financial investments world. The International Finance Corporation refers to these countries "frontier markets."
For those who are not acquainted with the term, frontier markets are the smallest, less liquid and less developed countries that make up a significant part of emerging markets. One could describe them as emerging markets which just started to “emerge” recently. Examples of such countries are Mongolia, Vietnam, Kazakhstan, Nigeria and Armenia. Though I have to admit, even with that explanation, it’s a little difficult to distinguish the Emerging markets from Frontier markets with a hundred percent certainty.
Since frontier investing is a rather new subject, many professionals disagree to which countries actually make up the sector. Different managers and index providers include different names in the list. For example the Claymore E.T.F. has included Chile and Poland in its lists, and also had mentioned them being the top five holding, though neither has made it to the list provided by the MSCI Frontier Index; the MSCI has included very diverse countries such as Argentina, Kenya, Romania, and Kazakhstan.
Generally, frontier markets can be identified by a few major qualities such as a high level of difficulty of access for outside investors, high presence of risk factors (both political and economical instability) and the potential for gigantic returns and devastating declines.
Of course, presence of high earning causes one to wonder how risky the general business is. And the risks involved in this enterprise are quite substantial to say the least. There are a number of risks associated with investing in frontier markets, such as political instability which can at times cause mayhem to the situation. Of course, factors like corruption and diplomatic tolerance on the other hand could play a rather positive role for investments. In the smaller frontier markets, liquidity adds to the list of risks. At times selling shares is a much harder process than acquiring them.
To many, it is easy to get entranced by the high returns generated by fast growing markets. But no successful investor has been through a successful business life without at least a few let-downs.
I would suggest a few of the things to keep in mind while trespassing on this field:
Firstly, the "booms" of the frontier markets are rather exaggerated by the media. The growths are a lot higher and the falls are a lot lower than in reality. In 2005, equity markets in the Gulf area were considered to be the best-performing markets in the world. But in 2006, the Saudi market had halved. It is advised to look for a similar trend in other countries.
Secondly, frontier markets are tiny and illiquid. It may often be surprisingly easy to buy shares in the market, but they could end up being almost impossible to sell for months at a time. Inactive sale periods are not exactly uncommon in the market.
Thirdly, there's always the risk that the frontier markets won’t meet expectations and grow into developed markets, at least not for the time being
And finally, frontier markets are only attractive when they are cheap to invest in. Unless you get a great deal, it is in some cases not worth the time or risks taken.
On a more positive note, frontier markets tend to be much less influenced by global conditions and sure pack a nice crunching return rate at the end of the day.
Should people invest into frontier markets?
Well, many already do and are happy with it, but many are also just standing on the side lines watching the process. A word of advice from someone who’s been more than just interested in the matter- frontier markets are definitely worth at least some attention and taking a look in to.
Author: Azizbek Mukhamedov
Комментариев нет:
Отправить комментарий