Looking For New Frontiers

Courtesy of Mark Mobius’ blog, an interesting commentary on frontier markets and the need to clarify some misperceptions of such investment opportunities:

“…Going back to the concept of frontier markets – be it investing or entering a new field, I believe that the better one appreciates the inherent risks in the ventures, the better one would be able to potentially benefit from the upside and avoid the danger areas.

Over the years, investors have grown more open to investing in emerging markets like Brazil, China and India. However, there continues to be some misperceptions about investing in frontier markets.

In general, frontier markets are defined as the ‘next’ emerging markets. The economies are more domestic-oriented with a limited number of publicly listed companies; hence, frontier market investments tend to be primarily limited to private equity. A frequent concern quoted by investors is about the quality of the company management. Frontier market investing often requires additional time and due diligence to assess the quality of the management team including more frequent on site visits to evaluate the business effectively. That said, whether in Nigeria, Kenya or Vietnam, we have found that more and more companies are led by a management team that has been educated in the West at academic institutions like a Harvard or London School of Economics.

When I look back at some of the markets in which we have invested, I’m amazed by the progress that has been made.  When I first went to Istanbul, Turkey to visit the stock exchange, it was in an ancient building in the old downtown area of the city. Trading was taking place in a meeting room for a few hours each day with the stock exchange president calling out names of each company in order and the audience of stock brokers giving their bids to buy or sell. Obviously, turnover was very small and the atmosphere was languid with just a handful of stocks being traded. Today, Turkey’s stock exchange is housed in a big modern building where computerized trading averages US$1.1 billion daily among 330 listed stocks with a total market capitalization of US$276 billion.[1]

Another frontier region which is very interesting is Africa. With its abundance of natural resources like oil, gold, silver, copper and steel and its large untapped consumer base, it is an exciting region to be in. Negative news about the region in general has put investors off and it is a heavily under-researched region, which gives us an opportunity to look for hidden gems.

Some investors raised the concerns that frontier markets are dominated by finance, telecommunications, energy and industrials companies, which lack diversification and these sectors tend to be more closely correlated to the global economy.

The initial availability of natural resources and energy first attracts foreign investors. As a country develops, building up its domestic infrastructure is a natural progression, and basic services such as banking, telecommunications and transportation are required to support the economy and the populace. The banks in the frontier markets such as Nigeria, Jordan, Qatar and Vietnam are in relatively good health with low loan to deposit ratios, as they are not as sophisticated as the developed Western banks. Be it the banks or the telecommunications companies, they are looking to penetrate an under-served population, which is where the growth potential and opportunities lie.

In an introduction that the late Sir John Templeton wrote for one of my books in 1996, he noted “People don’t think about problems in the context of history. They think that today’s worries will always be there and that existing conditions can’t change. I encourage people to try to foresee the future by considering the dramatic changes we have seen already. Emerging market investing as a frontier sport has made way for international investing, the search for bargains.” While I still see social media as a “frontier market” in the corporate arena, I can certainly envision its fast changing future and I am looking forward to continuing this journey of sharing my ongoing adventures, in emerging markets and beyond.”

This entry was posted on Wednesday, October 27th, 2010 at 4:09 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.