Boldly going: the exotic ‘frontier’ markets that intrepid investors are tipping for take-off

It was 15 years ago that academics began to predict a shift in economic power from the old order of developed economies to the newly named “Bric” nations.

Ever since, Brazil, Russia, India and China have been regarded as the coming powers, blessed with young populations, fast-urbanising societies and natural resources to fuel rapid growth.

But the Bric nations, now in their adolescence, have suffered growing pains. China’s slowing expansion was an inevitability but the giant nation is struggling to land softly and must now cope with problems of overproduction.

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Russia has rendered itself uninvestable to many, thanks to US and European Union sanctions and an uncertain mood set by the Kremlin. Brazil and, in particular, India are viewed more favourably but still face the difficult transition from emerging to emerged markets.

For investors still looking to get in on the ground floor of the next market to take off, even more exotic destinations are required and “frontier” markets provide them.

Be warned, you may be more used to hearing their names in connection with Foreign Office travel warnings than in stockbrokers’ notes.  Frontier markets are as varied and far-flung as Vietnam, Sri Lanka, Jamaica, Burma, Nigeria, Iran and Mongolia.

None the less, professional investors are becoming excited. Brian Dennehy, managing director of researcher, said: “I think it can be said that once institutions bite on frontier markets, even with small bites, it could drive these markets a lot higher quite quickly.

“The appeal is the huge potential upside when much of the developed markets are struggling to make investors money. These are countries both large and small which are underdeveloped but have key advantages that can underpin superior economic growth in the years and decades to come.”

Depending on which definition you use, there are 23-27 frontier markets around the world, and firms such as FTSE and MSCI have developed indices for them. Within these indices are around 5,700 individual stocks, but size and liquidity – the ease with which shares can be traded – mean the range of investable companies comes down to around 500.

Baring Asset Management, for example, researches only 150 companies for its Frontier Markets fund, and invests in just 45-55.

Jamaica offered the best returns of any frontier market in the past year, with its stock market rising by more than 50pc in 12 months. Experts, though, are more excited about countries in Asia and the Middle East and North Africa (“Mena”).

Believe it or not, Iran, that founder member of George W Bush’s “axis of evil”, is increasingly viewed as being on the verge of an economic leap forward.

Oliver Bell, manager of the T Rowe Price Middle East and Africa fund, recently visited Tehran. He said: “Iran appeared more like Turkey than Saudi Arabia, Tehran being a very cosmopolitan city with a much more liberal attitude than we expected.”

The country is educated, entrepreneurial and asset rich. Crucially, the lifting of US sanctions this year opens the way for capital to flood in and fuel expansion.

Roger Allen, managing partner at Mena Capital, an investment firm specialising in the region, said: “As we visit institutional investors around the globe we are seeing substantially more interest in frontier markets generally, and the Middle East/North Africa region in particular, as larger investors are struggling to make money in developed markets.

“Once these institutions start to commit funds, they will benefit from the positive structural growth story in the Mena region.”

Mena Capital identified Morocco as another exciting territory, where the country’s leadership, though still autocratic, displays a more open attitude to commerce than some democracies. King Mohammed VI of Morocco is popular in the country and “hard working, dynamic and smart”, according to Mena Capital.

Asia boasts similar cases of nations emerging from troubled pasts. Burma, also called Myanmar, is the cause of great excitement.

Aaron Armstrong, an analyst at Alquity Investment Management, said: “Until 2009, Myanmar was on a par with North Korea in terms of economic freedom, but there have been two transformational elections since then, with 2016 seeing the first truly civilian, as opposed to military, government.”

The new government, including acclaimed former political prisoner and diplomat Aung San Suu Kyi, has taken a number of steps to reduce barriers to foreign investment, including a new Condominium Law that allows foreigners to own property in Burma for the first time.

The country recently launched a stock exchange – its one constituent, FMI, is a conglomerate of interests in the country – and Burma is now home to four Kentucky Fried Chicken outlets.

“Myanmar is now at a pivotal stage in its economic and political development of a similar magnitude to that of the Eastern bloc nations at the fall of the Berlin Wall,” Mr Armstrong said.

Options for accessing the potential of frontier markets are limited for private investors and, of course, their highly uncertain nature means they should make up only a small chunk of your portfolio. Mr Dennehy said as much as 10pc was appropriate for well-diversified investors.

Alquity’s Asia fund prioritises frontier markets – Burma accounts for 5.3pc of exposure, through a Singapore-listed investment company. The fund carries a 1.1pc annual management fee, which will rise once other costs are included.

An investment trust, BlackRock Frontiers, has performed solidly over three years, rising by 17pc, and is available for 1.6pc a year. It currently trades at a discount of 3.4pc to the value of its assets.

An ETF, the iShares MSCI Frontier 100 ETF, will track an index of frontier markets for 0.79pc a year..


Source:The  Telegraph


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