Eight things you should know about frontier market investment
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Frontier markets are described as new or younger emerging markets. Most African countries can be classed as frontier markets. One person that knows all about frontier markets is Mark Mobius, executive chairman of Templeton Emerging Markets Group. For more than 30 years he has been scouring for investment opportunities in lesser-known countries. In a recent article, Mobius shared some general thoughts about investment in frontier markets. Here are the highlights:
1. Patience and perseverance According to Mobius, investments in frontier markets hold significant potential for long-term investors, but it requires patience and perseverance. “Just a few decades ago, China and India were considered frontier markets, and when I began my investment career Japan was considered an emerging market. So, you can see how economic progression and market development often go hand in hand.”
2. Frontier markets are not necessarily poor countries A country’s classification as a frontier market is based on a range of criteria such as economic development, size, liquidity and market accessibility.
“One might make the mistake of associating frontier markets with impoverished nations, but in fact, they encompass a broad range of economic development, ranging from countries where the average citizen’s yearly income couldn’t buy a used car, to some of the wealthiest countries in the world,” says Mobius.
He notes that frontier markets can be found across the globe and includes countries such as Panama, Argentina, Bulgaria, Romania, Saudi Arabia, Qatar, Cambodia and Vietnam. All the countries in Africa, with the exception of South Africa, can be classified as frontier markets. “Africa is a very fast-growing region – from 2001 to 2010, six of 10 the fastest-growing countries in the world were in Africa. So we are very excited by the growth prospects in those countries.”
3. Do your homework Mobius says it is essential to do one’s homework before investing in frontier markets. “We visit every country and every company we invest in. We examine the fundamentals unique to each country, and for each company we examine a history of profit/loss statements, balance sheets, and other materials to support a five-year forecast. It’s an intensive process. In particular, we look for companies that appear to have solid long-term growth prospects (supported by a youthful population and rising middle class) and good corporate governance. We also favour a culture of dividends.”
4. Corruption remains a problem in frontier markets, but the situation is improving Mobius says that from his experience, corruption is today discussed more openly.
“On a recent visit to Nigeria, I sat down with a prominent government official who, instead of trying to sweep their history of corruption under the rug, candidly discussed how they are trying to clean it up. I believe many leaders in frontier markets are waking up to the fact that corruption must be squashed in order to prosper on a global scale, and are working on implementing policies to provide oversight and uphold the rule of law. It’s also important to remember that while the headlines may cast a country in a negative light, individual companies can look very attractive from an investment perspective, growing their business in their local (and even international) market,” he says.
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