What do Mongolia, Ukraine, Argentina, Kazakhstan, Zambia and Croatia have in common? Bartle Bull investigates the world of frontier marketsby Bartle Bull / January 28, 2011 / Leave a comment
A good place to invest? The Nkana mine in Zambia—one of the world’s frontier markets. Photo: Per Arne Wilson
With economic growth stagnant in mature economies, and demand for raw materials surging in China, globally-minded investors piled into developing markets in 2010. MSCI, the data provider, saw its emerging markets index go up 15 per cent; but its frontier markets index performed even better, delivering a 20 per cent return.
What is a frontier market? The index itself is hardly a good guide. Developed Kuwait and the UAE are in it, while Iraq is out. Argentina, embarrassingly for Argentinians, is in.
For investors, frontier markets are those at the outer edge of the economic development and political risk spectrum. If Thailand is “emerging,” for example, and Vietnam is somewhere between frontier and emerging, Laos and Cambodia are clearly frontier.
Miles Morland, founder of Blakeney Management, the largest stock market investor in Africa and the Middle East, argues that the term itself means nothing.
“What,” he asks, “do the markets of Algiers, Baghdad, Damascus, Tehran and Tripoli have in common?” Many investors would answer that they are all frontier markets. But Morland’s answer is “Zip”: such markets have nothing in common. “One,” he says “is up 64 per cent in the year to date, while the rest have mostly been dead. If an asset class doesn’t exhibit some common traits then it ain’t an asset class, except when seen through the bottom of a lazy fund manager’s lychee martini glass.” (The best performing of these markets, the one that gained 64 per cent last year? Tehran.)
George Magnus, senior economic advisor at UBS, regards politics as the key. “It’s about how amenable the political infrastructure is to change and reform. In the 1970s, Latin America and the Far East were almost identical on most economic measures. Since then, Asia’s been the hare while Latin America’s been the tortoise. This is all thanks to superior political leadership from people like Deng Zhao Peng in China.”
If the current economic era began with the collapse of Lehman Brothers in September 2008, it is worth noting that since then, emerging markets (Philippines and Indonesia, Russia and Poland, Brazil and Chile) have risen almost 40 per cent, while the frontier markets index has lost 25 per cent.
Frontaura, a Chicago-based fund, had a good 2010 on the frontier, returning about 36 per cent. Steve Mack,…