An essential part of creating profitable investments is knowing the factors effecting the business. That stays true for frontier markets also. Conditions, risks, possibilities and the basic outlay of the financial environment are what make up the major body of those factors.
What are frontier markets, and what “sauce” goes with them?
Frontier markets are the generally less developed countries from the general cache of emerging markets. These countries are spread out all over the world, they include Armenia , Azerbaijan , Mongolia , Vietnam , Nigeria , South Africa
They tend to have 3 similar points that defines them.
1. Frontier Markets have a rather high level of difficulty of entry for foreign investors
2. They tend to have a high presence of risk factors (which are from both the economical and political perspectives)
3. And they have a potential for great returns or crushing declines
As for the question of what major industries create the main players in the market- banks are usually among the biggest companies an any emerging market. Banks and financial service companies make up approximately 65% of the overall frontier index, while Oil and Gas are the next largest sector weighing in at around 13%. Quite a few of the frontier countries are endowed with a rich supply of commodities. As one would assume, the type of commodity depends on the geographical position of the country. For example it’s mining for Mongolia , Kazakhstan also unearths oil, minerals and metals, while Argentina sells corn, soybeans and wheat, Nigeria plays a major role in potato exports and Vietnam
So in all honesty, when looked at the general description of frontier markets, they don’t look very attractive for investments… So why get involved with them at all? Well, simply speaking, very big profits! All this business has much to give back for all the risks taken. It’s just important to invest wisely.
There are just so many ways for an economy to develop itself, same goes for a specified market. Nils Taube- a former Junto presenter and master investor suggests to look at the way companied and trends have acted in the U.S. and Europe and place your bets on similar trends unfolding in frontier countries. This should also give you an idea of the general direction of the development.
Still not enough to be convinced that frontier markets are worth a shot?
Frontier markets offer investors the opportunity for greatly diversity within their portfolios. Many experts believe that some of these markets are undervalued because they are so rich in commodities and natural resources. They also have much lower labor costs.
China has been the pulling growth engine of the world for at least the past decade and many believe that it is more like two decades. But as the country develops itself, the Chinese people have growing power and influence versus the government as their wealth begins to rise. As a result the wages of the Chinese people will further rise because the government will not be able to effectively combat labor unions and workers as severely against labor and wage dissent. Already in China workers are organizing better benefits, hours and wages through different means of persuasion. Where will this bring the economy? This will cause increase production prices and slowly will start causing Multinational Companies who have their production based in China, to look for alternative countries, countries with a more disoriented labor protocol, cheaper prices and lower labor.
The economic recession that wreaked chaos in the developed areas of the world and on some of the emerging markets should have far less impact on frontier markets. Leveraging and lending that are everyday tools used in developed markets does not exist or is far more restricted by economic reality in the frontier countries. If a similar situation was to occur again, a frontier market should be able to maneuver itself around the flows much better than small and medium sized businesses in the developed markets.
Frontier markets are quite insulated from outside politics, leaving much room to work in, not restricted by socio-economic limits that have become general practice in the world. The only thing to look out for is that frontier funds usually rely heavily on oil or gold, and these are sensitive to fluctuations of outside sources.
I enjoy the idea of frontier investing due to my optimism when it comes to global trade, overseas markets and the great opportunities it presents. They always have great room for growth and diversity, which the developed countries seem to lack. For example, the Vietnamese economy is growing at a rate of around 9% per year, it’s a cheap place to do business- cheaper than most of Asia, and it’s easier because of the lack of numerous restrictions present in most developed countries.
Author: Azizbek Mukhamedov
Analyst at FrontiersInsight.com
