A Case for Frontier Markets

I received an early Christmas present last year. Yep, 2012 is now last year! Some time ago I had agreed to write a short chapter for a book recently published by Wiley. I had completely forgotten about it, but thankfully received some complimentary copies in the mail on Christmas eve.

I’ve since been reading through the book which is entitled, Opportunities in Emerging Markets; Investing in the Economies of Tomorrow

By the way, neither Mark nor I have any financial interest in the book. In other words, we don’t get paid if you buy it. I mention it simply in case you’re afflicted with the same disease I am, which is an intense curiosity about the world in general, and frontier markets in particular.

So far I think its a great read, and not only because of my contribution to it.

One of my favourite chapters was contributed by a gentlemen whom I’ve never met, one Marko Dimitrijevic. Marko runs Everest Capital. In digesting his chapter, I found little to disagree with.

On describing frontier markets he sums them up thus:

Fastest growing, most populated, least integrated economies in the world, and importantly, some of the most undervalued equity markets.”

Indeed, 39 of the 45 fastest growing economies in the world are frontier markets. Of the remaining six, none is a developed market.”

Call me simplistic, but if you are seeking higher than average returns surely it makes sense to hunt in the markets delivering them..?

Why then is less than 1% of the MSCI All Country Index represented by frontier countries?

I’ll tell you why. Lack of liquidity, incorrect perceptions of risk, and a lack of investable options make it very difficult for those who don’t possess the means to get boots on the ground and ferret out the best deals!

Add to that the fact that reliable information is difficult to obtain, and volatility can be multiples of that in deeply liquid, developed markets.

Frontier markets on a PPP-adjusted basis account for 15% of global GDP. Clearly we’re not even close to a weighting that seems reasonable. I’m personally excited with this setup, since its unlikely we’ll see the type of opportunities and valuations we look for where every man and his dog are hunting.

Marko goes on to say:

Over 37% of the worlds 15-34 year olds live in Frontier markets.”

Marko contends that, With access to technology and information, today’s frontier markets will likely emerge even faster than did their predecessors.”

This is happening across the world’s frontier markets right now. In many instances the technology that exists in developed countries, such as copper cables for telephones, requires upgrading. In frontier markets which have never had copper telephone wires, they are simply jumping straight to fibre or satellite. No upgrades necessary. In Africa banking through cell phones is common. They’ve completely skipped the large-scale use of pc’s for this task.

To illustrate the kind of growth rates that are achievable, consider this: Between 1990 and 2010 China experienced per capita GDP growth exceeding 840%. Over this same period mainstream emerging markets averaged per capita GDP growth of 39%.

Marko added, In the past 20 years, China and India combined have increased their share of world GDP 160%,  from 7.5% to 19.5%.”

I’m not particularly interested in China for a number of reasons, but I am very interested in many of the small, rapidly-growing markets such as Mongolia, Cambodia, Mozambique and Myanmar to name a few.

Folks, this is a massive sea change that is taking place. The developed world is, well, developed! We want to invest in the places where even the basic services still need to be met. The places I just mentioned above all qualify.

Mark and I spend our time focusing on these markets, the “China” of 20 years ago. We’ll talk more about why we invest in these markets over the next few weeks. We’ll also touch on specific examples of markets were interested in right now, why we’re interested and a few ways to play them.

Stay tuned!

- Chris

 ”Right now I own shares of companies in 28 countries.” – Jim Rogers