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