A new line of investing opportunities

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

Analyst at FrontiersInsight.com

Prospects of impressive levels

Frontier Markets - a term many investors have come across in the past few years, but to most it remains just as they saw it first- a “term”. Frontier Markets are the new “in” thing in the business world; one could call them a new “breed” of investment opportunities where the condition of the market is somewhere below the “emerging” stage, but that is more than compensated by the huge returns that such investments earn.

A shining bright star in the sky of frontier markets is Mongolia- a small country land-locked between Russia and China that survives of off importing energy and consumables from its neighboring countries.

So why exactly Mongolia?  Why a country that is renowned to the world only due to a barbaric war chief that cause havoc through all of Asia?

The answer is simple - Mongolia may have had a rather unconventional and un-extraordinary economical past, but that was till the year 2000. Major changes initiated through government policies in the past two decades have completely altered the situation in Mongolia.

Is it still politically risky?–Yes

Is it still unstable? –Yes

But are the investments still worth the risk? -Definitely Yes!

The returns on investments in Frontier Markets in general and Mongolia specifically are such that neither a single developing nor developed country can hope to match. Over the extent of the past 5 years the situation on Mongolia has changed such drastically that not only did they become main world exporters in multiple fields (mainly coal and minerals), but they have already been entitled the position of the second fastest growing economy in the world and now have so much Foreign incoming capital that the government is currently at a loss as to what to do with it.

To be honest it sounds like a scene from a movie where the main hero who just starts martial arts becomes a champion in a mere 3 months training period. Skeptic opinions are a normal reaction to this statement, I for one was someone who didn’t believe this in the beginning, but the facts present are more than reassuring.

Let’s take the Mongolian Stock (MSE) exchange for example: Its exponential growth is measured in three digits numbers when taken into percentages. Last few years have seen an increase in the indices growth of 800-1000% depending on sources. Just in the first few months of 2011, starting from

 January, the MSE index has already doubled. Company growths are even more astounding if you look at them, for example the Gutal OJSC has grown by 1 028,93 % from January, the Mogoin gol JSC with its 473,91% growth, or the Bayanteeg JSC which also grew by 463,54 %. These are just three cases taken from the list of all available companies in the MSE.

Do these numbers leave any doubt about the proficiency of the Mongolian market?

Personally in my case, they don’t.

Of course such possibilities come with risks, like with all Frontier Markets - Mongolia has a constant unstable condition, both politically and economically. The situation is apt to change and requires careful treating when considering investing in the market.

A major risk factor for the country is the unstable government policies that sometimes change on a monthly basis. New laws that may either enforce possibilities or diminish them are constantly being taken up. Thought the last one where the government had permitted excavations in previously closed copper and coal birthplaces has played a very positive role in attracting investors.

All-in-all, Mongolia is a great choice for the more risk-seeking part of the international investors who are ready to go through a little bit of trouble and reap much larger rewards than the safer and more conventional methods.

Author: Azizbek Mukhamedov 
Analyst at FrontiersInsight.com

http://www.frontiersinsight.com/