Growth: the final frontier

18 Nov 2014

Frontier markets have enjoyed strong growth of late, but  investors need to consider more  than just the headline figures  before investing. Pádraig Floyd  investigates.

Frontier markets have demonstrated strong  recent growth, putting better known  markets  in the shade.

The MSCI Frontier Markets index is up  more than 13% year to date and more than  18% on a 12-month basis (as of 23 October),  but despite double digit performance, frontier  markets are not to everyone’s tastes.  Like the Spanish Inquisition, frontier markets’  two main weapons are fear and  surprise,  and many institutional investors  greatly fear getting caught with their pants  down.

Although some use hurdles to delineate  whether a market has made it a far as  earning  frontier status, such as an equity  market  capitalisation of 40% to 60% of  GDP, in truth, frontier markets come in all  shapes and sizes. As a result, different investors  will look at them in different ways,  so make sure you read the small print.

The MSCI index uses market liquidity and  the size of the index, but does not take into  account economic criteria, the speed of  growth or accessibility.

This is important, because the strength of  the performance might be attributed to two  markets which are now excluded – Qatar  and the United Arab Emirates (UAE).  These are two of the richest economies in  the world – in 2013 Qatar had the third  highest GDP per capita according to the  World Bank, after Luxembourg and Norway  – and, until recently, they listed as frontier  markets.

It is therefore important that investors take  this into account and don’t get caught up in  the overall figures, says Dominic  Bokor-  Ingram, portfolio adviser at  Charlemagne  Capital, as “the outperformance  in the last couple of years in frontier  versus emerging isn’t nearly as big as it  looks on the face of it”.

OPPORTUNITIES 

Despite this, there are huge opportunities  to be had from investing in frontier  markets.  Demographics is the driving force, with the leading economies –  sub-  Saharan Africa, in particular Nigeria  and areas  of south east Asia, most notably  Vietnam – have rapidly growing younger  populations ready to feed a growth in the  economy firstly as workers, then  consumers.

Jobs are moving there because established  emerging and emerged markets such as  China and Korea have hit the middle-income  trap which eats into their margins  and so they seek to move their production  offshore.

Vietnam is now making many of the shoes  Chinese producers used to export, on  behalf  of those Chinese firms. The middleincome  trap has already seen production  for US companies move to Mexico which  offers the kinds of margins that used to be  available in Asia.

“The projected earnings growth is 32% for  2014 and 16.5% for 2015, versus about 8%  in the emerging markets,” says  Bokor-  Ingram. “Frontier markets are  cheaper today than emerging with much  higher growth prospects.”

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