The Case for Frontier Equity Markets

Abstract

Frontier Markets present an opportunity for investors willing to move beyond conventional universes. Located in Asia, Europe, the Middle East, Africa, and Latin America, these markets are generally not included in the popular developed and emerging market indexes. Typically, access can be difficult and liquidity can be low. However, their valuations are also low, as are their correlations, both among themselves and with other more developed markets. While many investors still perceive frontier markets as being in decline, ravaged by wars, disease, famine, and authoritarian governments, this view often reflects media reporting rather than reality. Many frontier countries have undergone a radical restructuring of their economies since the early 1990's, and their macroeconomic fundamentals are often sound and encouraging. Frequently, real per capita GDP is rising, inflation is low, currency exchange rates are becoming more stable, and corporate profits and return on investment are relatively high. Thus, from an economic standpoint frontier market countries are indeed emerging rather than stagnating. They are not formally recognized as emerging today, but with further progress it will not be possible to ignore them much longer. Looking ahead, these markets may represent the final frontier for global capital. As the emerging markets of today move on to become part of the developed world, the stage is set to bring along a new set of emerging candidates in the frontier markets. While available information is often sparse, local regulations are complex, and research coverage by analysts and brokerage firms is limited, these were exactly the characteristics of emerging markets 20 years ago. These challenges create an opportunity for investors to uncover neglected companies with healthy, improving operations and stocks that have been ignored by the mainstream investment community. We believe that many of these markets will follow the same path that emerging markets have taken during the past 20 years, and that patient investors in Frontier Markets will be rewarded.