The Next Frontier?

Two interesting articles on emerging and frontier markets.  The first, via GuruFocus, takes a look at a new ETF focused on frontier markets:

Every investor should allocate a portion of his or her portfolio to emerging markets. Most often, the phrase “emerging markets” calls to mind the BRIC: Brazil, Russia, India and China. But these countries have developed vibrant, reasonably well-regulated markets. They’re simply not the frontier markets they once were.

Guggenheim Frontier Markets (FRN), on the other hand, offers exposure to the next frontiers for investment, with holdings in far-flung destinations such as Kazakhstan, Nigeria and Qatar. In recent months, the exchange-traded fund (ETF) has traded at a small but persistent discount to its net asset value, reflecting the ongoing turmoil in the Middle East and concerns over flagging emerging-market growth.

A little more than 10 percent of the fund’s assets are allocated to equities in Egypt, a country that just concluded its first round of parliamentary elections following the ousting of longtime president Hosni Mubarak. Although the nation’s stock market has declined by more than 40 percent in 2011, the peaceful elections have contributed to a rally in Egyptian equities. Domestic investors drove the gains, as foreigners sold off equities amid fears that Islamist parties could dominate Egypt’s newly elected parliament. These fears appear to have been justified; the Muslim Brotherhood is expected to carry about 45 percent of the parliament’s seats.

Nevertheless, confidence among domestic investors is encouraging because they make future gains more sustainable as the political climate normalizes. However, inflation continues to rise — the first true economic challenge faced by the new government.

But one can only endure frontier life for so long. The ETF investment also offers exposure to traditional emerging markets.

Chile, Colombia, Argentina and Peru account for 70 percent of the fund’s assets. Chile alone accounts for more than a third of the ETF’s portfolio. The Chilean market has come under pressure from worries about the health of the global economy; Chile’s export-based economy depends heavily on global copper demand.

Chile is an economy in transition. One of the nation’s greatest assets is its youthful population and rising household incomes. Chile is also a nation of savers, with a private savings rate of more than 21 percent of disposable income. This savings rate has buoyed the country’s economy; Chile’s debt-to-gross domestic product ratio runs at just 6 percent.

Economic transitions don’t occur overnight. But Chile’s deep trade relations with China will hold it in good stead in the interim. China is Chile’s primary export market, and recent policy shifts suggest that the mainland is ready to kick growth into high gear after years of aggressive monetary policy tightening. China recently surprised markets by cutting banks’ reserve requirement ratio by 0.5 percent, the first such move in three years.

Stronger growth from China will fuel demand for a laundry list of commodities, including copper, which Chile has in abundance.

Although there’s more volatility to come, Guggenheim Frontier Markets remains a top ETF to own.

The second, via Money Morning, looks at other emerging markets:

You may be surprised to learn that some of the world’s best investors are buying heavily right now – not because they think we’ve hit a bottom, or even the bottom, but because they’re setting themselves up for the next big run.

Take Mark Mobius, for example.

Long regarded an emerging markets pioneer, Mobius is in charge of more than $50 billion worth of assets on behalf of Franklin Templeton. Lately, he’s snapping up Romanian real estate, Nigerian banks, Kazakhstani oil companies and more.


There are many reasons, but basically it comes down to this: Despite the fact that emerging markets returned almost 250% from 2001 to 2010, the old playbook no longer works.

And I have to be careful when I say that because many investors will blithely assume that emerging markets are dead. They’re not – it’s just time to redraw the map because the best opportunities are no longer where you’d expect.

It’s no longer about the BRICs (Brazil, Russia, India, and China), for example. Sure these countries remain great places to stake your claims on the wealth of newly found purchasing power and consumerism, but it’s the so-called MINTs (Mexico, Indonesia, Nigeria, and Turkey) that may offer a faster route to riches.

Or the Next 11, or N-11, as Jim O’Neill, the economist who coined the term “BRICs” a decade ago, calls them. The N-11 is basically the MINTs plus Bangladesh, the Philippines, and Pakistan plus a few more countries on the fringe of “civilized” thinking.

Then there’s the VISTA (Vietnam, Indonesia, South Africa, Turkey, and Argentina) nations and the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa).


Yes. For the first time in modern history, emerging markets are no longer completely dependent on Western economies nor demand, a point you’ve heard me make repeatedly in the past. At the risk of sounding like a broken record, this gives them an unprecedented range of options largely independent of the political, financial, and economic swamp the developed markets have become.

This is not the kind of thing you’re going to pick up on in the mass media, but every single one of those nations is set for a runaway investment boom because they are advancing faster than almost everybody expects.

In fact, many of the big investing houses like Goldman Sachs Group Inc. (NYSE: GS), Fidelity, HSBC Holdings PLC (NYSE ADR: HBC) and others feel the same way I do – that the MINTs and N-11 have the potential to be every bit as profitable over the next 10 years as the BRICs were over the past 10 years.

But why not stick to the BRICS right now?

Every one of the BRICS has moved from raw capitalism, for example, to the more refined steady state that is accompanied by an entirely new class of investments in insurance, medical treatments, education, and even entertainment. This makes them steady growers to be sure, but also potentially slows them down a bit.

At the same time, rising wages and dramatic increases in the cost of living in BRIC countries means that profit margins are being squeezed, so it becomes harder to generate the same returns in years that used to take months.

Case in point, i n what is perhaps the ultimate irony, Chinese and Brazilian companies are beginning to offshore their own labor to markets like Vietnam and Colombia.

Consequently, many BRIC officials are more concerned with managing inflation and putting the brakes on at present . India has raised rates 12 times in the past 18 months while China has tacked on five rate hikes since last fall. Even so, the former is growing at 8% a year, while the latter is on track for 9% growth in 2011 — more than six times the pace of the U.S. economy.

The MINT and N-11 markets may grow even faster.

Admittedly, the thought of investing in markets that Indiana Jones would find appealing is scary.

The risks and volatility remain quite high. Fraud, insider trading, manipulation and graft are all part of the experience — and will be for some time to come.

But in the words of Jim O’Neill: “Just as we are getting downgrades in the developed world, we are getting upgrades in the developing world.”

Believe it or not, private growth drivers in key sectors in each of these markets are actually accelerating. Energy, technology, agricultural resources, and defense contractors, in particular, are all bright areas as the world learns to do more with less – especially in economies that have never had much of anything to begin with.

That’s why Mobius (and many savvy investors like him) aren’t particularly alarmed by the potential for market chaos if the euro comes unglued. He knows, as we do, that any temporary crash would simply give him new opportunities to buy already battered emerging market stocks at even steeper discounts to where they are trading now.

Still can’t stomach the thought?

Well, I hate to say it, but then investing isn’t for you.

If you can’t understand that whippy markets produce upside – especially when it comes to currently untapped, largely off- the- radar- screen markets – then you really haven’t got a decent chance of getting ahead over the long run.

There is no easy money – just intelligent decisions to be made.

This entry was posted on Tuesday, December 20th, 2011 at 2:19 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.