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The New Frontier: Frontier Market Investment up 15% as Big Rewards Are Found in Small Places

September 13, 2013Article by Ray Withers

Emerging markets used to offer some very tasty returns, but more recent poor performance has caused investors to look for a new frontier.

Since the start of the year, emerging markets have suffered losses of $2.1 billion USD, while frontier markets have more than doubled to $3.1billion USD. No surprise then that frontier market investment is up 15% from this time a year ago.

Get your Barings for strong, long-term growth

According to a Barings Asset Management poll, nearly one in five pension fund managers believe frontier markets have the biggest potential for equity gains over the next ten years. The poll took into account the opinions of 75 investment managers and revealed high confidence in the developing world, over more developed areas.

Barings’ head of UK and international institutional sales, Andrew Benton, told us: “The growing interest in frontier markets is a trend we believe is likely to grow. Barings believes frontier markets offer the potential for strong long-term growth, in a low growth world.”

Good things can come in small packages

If you’re new to frontier markets, then here’s a little overview for you.

The term ‘frontier market’ was coined by Farida Khambata of the IFC Emerging Markets Database (EMDB) in 1992. It is used to describe markets which are too small to be classed as emerging markets, but which have a high level of development for their size and are open to foreign investors. Many have relaxed (or relaxing) investment restrictions, but they won’t qualify if they are too economically or politically unstable.

When finance giant Standard & Poor bought EMDB from IFC, the company launched the first investible frontier market index. Subsequently, rival Barra began its own index and, in early 2008 Deutsche Bank launched the first frontier market exchange on the London Stock Exchange.

Bless the rains down in Africa

So what’s happening today? Currently, Africa is in the frontier spotlight and Africa-focused frontier markets firm, DaMina Advisors, believes that frontier markets in Africa, Latin America and Asia, will synchronise as Brazil, India, China and Russia have already.

The Sunday Times reports: ‘World grabs at Africa’s land.’ The story tells us that, in 2009, farmland more than twice the size of Britain was acquired by private investors. The Agrica rice plantation, covering 20 square miles in the Kilombero Valley in east Africa, is cited as the cause for the excitement.

Funded by mass Western investment totalling around $40 million USD, Agrica employs the most advanced practices to provide staple food for its poor local market. This strategy is praised by the World Economic Forum as doing African industrial agriculture in “the right way” and the South Agricultural Growth Corridor of Tanzania wants to implement the strategy across the country.

A cautionary tale and a giant cash machine

However, investors should be aware that not all land grabs are what they appear to be. Possibly the most infamous case was in 2009, when the government of Madagascar leased half the country’s arable land to South Korean conglomerate, Daewoo, leading to the coup which brought down the government.  Ooops!

This example, although extreme, is a great warning not to jump in before you’ve done your due diligence. A collapsed wall might be easier to rebuild than a fallen government, but it is still going to give an investor a headache.

When the deal is genuine though, it’s a win-win, providing investment for poorer areas and returns for the investor as the area’s capital grows through the use of the investment. The key in the Kilombero Valley was Agrica’s smallholder programme, which offered microfinance loans and courses in grid planting, seed selection and fertiliser. More than 4,300 local farmers signed up and the project which is expected to become a “giant cash machine.”

Internal demand and great performance

CNBC also recently reported frontier markets to be enjoying a renaissance. Sebastien Lieblich, executive director of global index compiler MSCI, told the station: “Frontier markets are very much focused on internal demand … and that probably explains why we see a great performance.”

Despite a significant number of frontier markets being in the Middle East  – with the most heavily weighted countries belonging to the Organization of the Petroleum Exporting Countries (OPEC) – Lieblich insists their growth was not dependent on the energy sector or oil exports. Rather he says the strength is in financial markets and telecoms.

The value of valuations and how to avoid possible pitfalls

Samuel Vecht, portfolio manager at Blackrock, told CNBC that each frontier market had its own “peculiarities” and that its investors were equally diverse. Vecht also warns investors about possible pitfalls, saying: “Never ignore valuations – markets can appear really attractive, but if you ignore valuations you do so at your peril.”

A further potential pitfall when looking to frontier markets is reputational damage. A number of global brands received the wrong kind of attention after the factory to produce Western clothing in the frontier market of Bangladesh collapsed, killing hundreds of workers. Investors should consider factors such as labour standards, health and safety, environmental issues and business practices.

Explore the undiscovered frontiers

Jack Ablin, CIO at BMO Private Bank, believes frontier markets are still relatively “undiscovered” and “the frontier is now where the emerging market was 13 years ago.”

He comments: “I wouldn’t necessarily sell out of the S&P 500 to buy frontier, but if you already have some exposure to international or emerging markets then this could be a good time to shift some money into these temptingly tiny locations. It could be a good diversifier that’s incrementally cheap.”

So which frontiers should investors be looking to? Myanmar is getting a lot of attention and we covered the Myanmar story in our blog Tracking the Burmese Tiger: Investment Adventures in Myanmar.  Other frontier areas which are catching our own personal attention are Senegal, Mongolia, Argentina and The Philippines. We will be tracking these frontier markets over the months to come, so watch this space for updates as and when they happen or get in touch on +44 1865 202 700.

Author

Ray Withers

Ray has over 17 years’ experience in the international property market and bought his own first international property investment back in 2002. Aside from running Property Frontiers, Ray has been involved in residential, hotel, student and commercial property investment and development in both the UK and overseas and co-wrote "Where to Buy Property Abroad - An Investor's Guide". As Founder and Trustee of the Frontiers Foundation, Ray is directly involved with many of its projects to ensure they have a direct and tangible impact in individual communities across the globe. He is passionate about property, travelling, scouting out new opportunities and finding time to spend with his young family.
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