What’s your perception of frontier markets?
Is it based on the picture Wall Street paints of dictatorships, famine, military conflict, disease, poor living conditions and natural disasters?
If it is, I don’t blame you…
It’s hard to get past all the negative headlines. Besides, it wasn’t that long ago that the BRIC countries (Brazil, Russia, India and China) spooked investors, too.
As Warren Buffett says, though, “Be fearful when others are greedy and greedy when others are fearful.”
So today, allow me to shed some light on what’s becoming a rather investor-friendly corner of the global market.
A Notable Transition to Frontier Markets
According to Bloomberg, emerging markets have fallen out of favor. Thanks to weakening currencies, high debt and dropping equity, investors have yanked $13.9 billion from emerging markets, or “27% of all inflows since 2005.”
Conversely, investors have slowly – and very cautiously – begun putting money into frontier market funds. (Some $3 billion so far in 2013, three times the amount from last year.)
As you know, frontier markets (those in the beginning stages of capital market growth), include 50 developing countries with more than 1.2 billion people – representing 7% of the world’s GDP. And some frontier markets – including the United Arab Emirates, Nigeria, Ghana, Tanzania, Zambia, Vietnam, Pakistan and Bangladesh – are coming of age rapidly.
So much so, that the MSCI Frontier Market Index has gained 22% over the past 12 months. At the same time, we’ve seen just a 3% rise for MSCI’s Emerging Market Index (and it’s falling as we speak).
So why are investors starting to pour money into frontier markets?
Islands of Opportunity
Some believe that the increased interest in frontier markets comes from the fact that they have very little correlation to emerging or developed nations. So when turmoil erupts – or other currencies falter outside their borders – it remains business as usual for them.
As Sean Lynch, Global Investment Strategist for Wells Fargo Private Bank, pointed out recently in a USA Today article, “Frontier markets are largely insulated from problems plaguing bigger countries. When stock and bond markets in the U.S. and Europe were rattled by talk that the Federal Reserve would withdraw some of its support for the U.S. economy, many countries’ currencies sank against the dollar.”
But frontier countries’ currencies didn’t flinch, he said.
They’re literally in their own worlds – not reliant on food or oil exports, or borrowing money from China to pay debt.
Revenue is robust, and it comes from a number of sources. Many areas are rich in resources or grow cash crops. Others excel in textile, electronics, or paper manufacturing.
Of course, you can never discount the spirit and fortitude of people who live, work and raise children in these countries. They’re determined, much like the emerging and developing nations were (and are today).
Yes, like Wall Street reports (day in and day out), there are risks. But are they any worse than investing in the BRIC nations in the 1990s, or in the United States when the NYSE formed in 1792?
Only time will tell. But some risks are just worth taking.
To explore this opportunity, I’d suggest using the iShares MSCI Frontier 100 ETF (FM). It’s comprised of the 100 largest companies spread among Kuwait, Qatar, United Arab Emirates, Nigeria, Pakistan, Kenya, Oman, Kazakhstan, Argentina and Vietnam.
Up 7% YTD, it’s attracted $210 million in assets, with the majority coming in 2013.
Of course, the 2% yield is just icing on the cake.
Ahead of the tape,