Frontier Investing

While we’ve been following this topic for some time, popular financial columnist Jane Bryant Quinn recently noted that investing in emerging markets isn’t optional anymore. Globalization means that countries once thought of as marginal are central to any smart investment plan.  As the article states:

“…Who’s on the frontier? Ukraine, Cyprus, Estonia, Kuwait, the United Arab Emirates, Ghana, Nigeria, Ivory Coast, Ecuador, Jamaica, Kazakhstan, Vietnam and perhaps two dozen more. Investment managers group them under acronyms: MENA, for Middle East North Africa; EMEA, for Europe (specifically, eastern Europe), Middle East and Africa.

…Each frontier country has a slightly different story with the common investment themes.

There’s the commodities boom — oil, of course, but also metals and agriculture. The consumer explosion — rising urban middle classes snapping up cell phones, cars, television and appliances. Infrastructure — the International Monetary Fund has forgiven much of Africa’s debt, leaving these governments with surpluses to invest in electricity, telecommunications and roads. Finance — with lenders prospering. Construction — offices and apartment buildings, airports and shipping facilities. The MENA area’s national bird is the construction crane.

…A more compelling reason to own them is, simply, globalization. Modern commercial and consumer cultures are being created in places they didn’t exist before.

The economic drivers include new trading patterns, the movement of manufacturing jobs to lower-wage countries, high commodity prices, privatization of government industries, growth in the pools of local investors, direct investment in frontier countries by foreign pools of capital (especially from China) and political and capital-market reforms.

“They’re where the emerging markets were 10 or 15 years ago,” says Fahmi Alghussein, Morgan Stanley’s head of distribution in Dubai. Economic growth rates are running at 5 percent and up, twice that of the developed world.

Antoine van Agtmael, chairman of Emerging Markets Management LLC in Arlington, Virginia, has been investing in Africa for 14 years. Returns, he says, have been four times those of the traditional emerging markets. “A few years ago, you could buy Unilever Nigeria or Guinness Nigeria for peanuts,” he says, “and they’re well-managed companies with great products.”

…Not that everything is rosy along the global frontier. Vietnam’s bubble ended this year in tears. There’s political risk, such as the blowup after the elections in Kenya and the risk that the boom in commodity prices slows. Electricity shortages are damaging growth south of the Sahara. Small changes in cash flows can have a huge impact on markets because they’re so thinly traded….”

This entry was posted on Wednesday, May 7th, 2008 at 12:23 pm and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.