INVESTOR’S NOTEBOOK: Wild ride on the frontier
Bank listings dominate in the majority of less-developed stock exchanges
We used to refer to developing countries as the Third World and a few cruel commentators referred to really poor countries as the Fourth World. Templeton’s Mark Mobius and his peers realised back in the 1980s that neither of these terms was marketable, invoking as they did famine, helplessness and in general countries which could not stand on their own two feet.
So emerging markets were born from the ashes of the Third World. And many of these countries now have companies which are indistinguishable from those in developed economies (think Samsung and Tata Motors) — they are well covered by Western analysts and traded regularly by conventional global funds. A lot of the excitement has gone out of the emerging markets class, which is fine for most investors, but not those who invested with Mobius on the promise that he would be "the Indiana Jones of investment", giving an exciting ride in unexplored territories.
Today’s successors to Indiana Jones invest in the shrewdly named frontier markets. These aren’t exactly the same as the old Fourth World: Ethiopia, once so troubled by famine, is now a high-growth economy; sadly, it does not have a stock exchange or free capital markets. But Bangladesh, another prominent scene of human tragedy in the 1970s and 1980s, is now one of the 10 leading countries in the new Credit Suisse frontier markets index (CSFM). With a GDP of US$226bn (R3.1trillion), it is a larger economy than Romania, Morocco, Kenya and even Vietnam. Bangladesh has been so successful with its industrialisation that it now has a higher per capita income, on a purchasing power parity, than Kenya.
Argentina has the highest per capita income of the frontier top 10 at just over $22,000. It would certainly be a nonsense to describe it as an emerging market. It was the richest country in the world, along with Australia, in 1900, but it has been the only developed economy so far to fall permanently to Third World status. Nonetheless, it has had a stock exchange since 1854 and makes up the biggest chunk of the investable universe in the CSFM 30, at 17.5%. This figure excludes Iran, an economy twice the size of Romania or Vietnam but which is excluded from all indices until all restrictions are removed and a free flow of capital is introduced. There is certainly a lot of overlap between a frontier fund and an Africa fund. After Pakistan, which accounts for 10.9% of the available equity in the sector, comes Morocco, Nigeria, Egypt (usually considered an emerging market), Kenya and Mauritius. Mauritius might well become the subject of intensive on-the-ground research along with some other frontier markets such as Sri Lanka, Jamaica and Trinidad & Tobago — Ukraine and Nigeria rather less so. Doing business might prove to be a challenge in some of the frontier markets, and it does include some trouble spots which get in the news like Panama, Lebanon and Kazakhstan. But it also includes rich countries such as Oman in the Gulf.
Much like the Africa ex-SA index, the CSFM index has a strong bias to financials, which make up half the total market cap — and within that almost all banks, with very little insurance. Bank listings dominate in the majority of less-developed stock exchanges. It is no surprise given the success of mobile telephony across these regions that telecoms are second, with resources and consumer staples making up almost all the rest. There must be a huge opportunity of listings in the sectors which make up barely 7% of the universe collectively — namely health care, utilities, industrials, IT and above all consumer discretionary.
Investors looking for high growth at high risk should sell out a portion of their staid emerging markets holdings and reinvest at the frontier.