Eight things you should know about frontier market investment
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5. Liquidity – a challenge but also an advantage Liquidity – the degree of how easy it is for an investor to get his/her money out of an investment – is often a risk when investing in frontier stock markets. However, according to Mobius this can be a double-edged sword.
“A low investment base in an underdeveloped market can make it a challenge to buy or sell a stock on demand and at a fair market price. However, a lack of liquidity can actually be an advantage, because we can pick up stocks we see as attractive that no one else is interested in, at bargain prices. It can often take time to build a position in a particular stock (sometimes many months), but if the market ultimately recognises the value of these companies, holding blocks of appreciated shares is, of course, quite desirable,” he explains.
6. When the risks are too large Mobius says that sometimes there are risks that are too big to take. “Our biggest concerns include capital controls and expropriation of assets. We have to be able to get our money out if we need to. So far, this hasn’t been a huge problem in most countries we invest in, but it is always something we are cognisant of.”
7. Not all about commodities “There is a misconception that the fate of all frontier markets is highly dependent on commodity prices. While it’s true many are indeed rich in natural resources and have a healthy level of exports, others depend more on domestic consumption for growth. Kenya, for example, is more agriculturally oriented and domestically driven, while Nigeria is more dependent on oil exports. Sources of growth can evolve in a positive way. For instance, to help diversify its economy, Nigeria is looking to start refining its oil to produce more value-added products for export. It is also developing more domestic industries to feed, clothe and house a growing population,” says Mobius.
8. Long-term growth potential “The most compelling reason to invest in frontier markets is their long-term growth potential,” says Mobius. “When you compare the growth rates of many developed nations to that of frontier markets, you find a wide discrepancy. For example, US GDP in 2011 was under 2%, while … Nigeria saw GDP of 6.9%. Growth in an economy should lead to growth in corporate earnings.”
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