Introduction- a little bit about Nigeria- political, economical position

When Joseph Rohm, manager of the T. Rowe Price Africa and Middle East fund visited the capital of Nigeria, Lagos, for the first time, he was followed everywhere by guards carrying firearms. The situation is a complete opposite now, he walks the streets absolutely unguarded. “I feel safer in Lagos than I do in Johannesburg,” said Mr. Rohm, who is a native of South Africa.

The big players in the investment industry have created mutual funds and exchange-traded funds that pull most of their money in frontier regions. Mr. Rohm’s fund had begun in 2007 and is one of the older offerings. At the end of April, it had invested three quarters of its finances into countries such as Nigeria, Kenya and Qatar. For the 12 months through June, it had returned 17 percent.

According to the UN classification, Nigeria is a middle-income nation with developed transport, communication and financial sectors. It has the second largest stock exchange on the continent as its economy is one of the most developed ones in Africa.

Multinationals that seek the next big growth opportunity should focus their attention toward Nigeria. With a population of approximately 140 million people and a forecasted GDP growth rate of 7.3 percent in 2011, Nigeria has become the consumer market with the highest-potential in Africa, especially considering its increasingly confident and brand-conscious middle class.

A great quality of frontier-markets that Nigeria shares, is that at a time when the Western Economies are struggling, the US exchange rates are sagging and several of the leading emerging markets (such as Brazil, China and Russia) have faltered these years after surging in 2009- is that the growth in Nigeria is stable and is not as much affected by recessions due to its limited dependency on credits.

According to the Central Intelligence Agency, Nigeria holds the world’s 10^th largest oil reserves in the world. For a very prolonged period of time, the riches produced unrest, especially in the oil-producing Niger Delta, where residents rebelled against what they saw as too small a share of the profits. Lately, a chain of democratic transitions has stabilized the delta and the country as the government switched form a military dictatorship to a more democratic one. At the same time, policy makers in Nigeria and other similar countries have tamed hyperinflation and liberalized trade. That combination of resource wealth and macro stability acts as a strong attracting agent for investors.

In the Nigerian economic profile, petroleum plays a central role as a major industry as it places itself as the world’s 12th largest petroleum producer. This supports the country as we can see that the industry accounts for almost 80% of the GPD share and above 90% of total exports from Nigeria. Due to the surge in international oil prices during 2007-08, Nigeria managed to reap an annual GDP of $352.3 billion.

Even though the country has had an increasing demand for key industries and has been experiencing rapid economic growth, there are still challenges present for foreign corporations that wish to enter the Nigerian market; unfinished distribution networks and shortages of skilled labor are some of the examples. There are three benefits and challenges that are relevant to those companies that do decide to act on the opportunity of investing in Nigeria: organic/Greenfield entry, join venture /partnership or merger and acquisition. Scenario planning could also act as a helpful tool for corporations looking to assess their options.

SME Investing Nigeria

Nigeria is in a great position for SME investors from all over the world as she records an annuals 6% economic growth. While most investors from Europe and the Northern America have largely been frightened by negative media propagandas of the country in the past, Asian entrepreneurs took the challenge and proved the negative Western press to be incorrect. Today, Asia (mainly China) is the largest group of global SME investors all over Africa. Having mastered the Nigerian economy terrain, they attempt to push new grounds of investment while the Europe and Northern America remain envious of their investment returns. An interesting fact is that most of the early Asian SMEs in Nigeria had begun as merchant traders and retailers of consumer goods. Today, they have expanded to small scale manufacture and food packaging consumer products that are now being exported beyond even the African market. One can find a myriad of success stories that derive inspiration and faith in the Nigerian economy.

A little bit about Africa

Investor interest in the sub-Saharan Africa (SSA) Frontier Markets had high levels of interest before the global financial crisis.

These sub-Saharan countries received considerable volumes of capital inflows, following the steep rise in private capital flows to other emerging and developing countries in the middle of the past decade. Although the flows has have a brief reverse during the climax of the crisis, the low interest rates in more developed countries and a decrease of global risk aversion have renewed interest of investors to scour the globe in search of attractive investment opportunities. A list of following questions are interesting to answer:

· To what extent has the resurgence of global capital flows translated into a resumption of private capital inflows, especially portfolio inflows, to sub-Saharan Africa FMs?

· Do global push factors or local pull factors dominate in steering investor interest?

· Why have some sub-Saharan African FM countries garnered investor interest, while others—including some larger countries—have been sidestepped?

· Which policy options are most suitable for sub-Saharan Africa FM countries to use at this juncture to address any resumption of large capital inflows?

It is important to understand the determinants of and scope for private capital inflows of sub-Saharan African countries for a number of different reasons. Firstly, such flows are increasingly the main source of external financing for many countries in the region. The weakening in the fiscal accounts of most advanced countries because of the crisis also implies that the prospects for sustaining even current levels of official financing are doubtful. Secondly, private flows tend to be more volatile than others. At times flows are large relative to the size of the economy, complicating macroeconomic management.

The main findings are the following:

· The overall trend of capital flows to sub-Saharan Africa’s FMs mirrors trends elsewhere, with strong inflows before the global crisis and a sharp decline during the crisis.

· Postcrisis, and in 2010 in particular, more differentiation is evident. Private investors, possibly still smarting from the global financial losses of recent years, seem to be distinguishing between markets. Thus, country-specific pull factors govern the pattern of flows across regions and countries. In a few of the region’s FMs (Ghana, Mauritius, and, to a somewhat lesser degree, Zambia) portfolio flows picked up markedly in 2010. But in others, there is little sign of resumption in inflows.

· For fixed-income investments, market participants identify yields as the key driver of inflows. Thus, the monetary policy easing that was undertaken by many of the FMs may have reduced the incentives for inflows. Exchange rate volatility is another factor that seems to have played a role in some countries. For equity portfolio flows and foreign direct investment (FDI), a range of other factors contribute to the expected return and riskiness of the investment and influence whether inflows have resumed.

· The region’s FMs outperform other groups—including FMs in other regions, other sub-Saharan African countries, and even select emerging market countries—on a number of indicators of institutional quality, growth prospects, and macroeconomic outcomes. As the contribution of official financing continues to diminish, improvements in many of these areas could help other sub-Saharan African countries to attract private sources of financing for investment and growth.

· Two of the region’s eleven FMs have opted for capital controls in response to the volatility of portfolio inflows, but most countries have continued to rely on macroeconomic policies and macro prudential measures to respond to pressures from current and prospective inflows.

I believe when taking into consideration the position Nigeria holds and the sub-Saharan Africa maintains, including all its nuances, Nigeria can be a very “interesting” market for investments, generally like most frontier markets.

Frontier Markets - core ideas and the positivism

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 and many others.

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 is the current leader in manufacturing.

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

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