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Why Now Is The Time To Be Investing In Frontier Markets

September 12th, 2013

frontier marketsDavid Zeiler:  An axiom of investing is that those who get in on great opportunities early make the most money.

Knowing how to invest in frontier markets gives you one of those great, rare opportunities. And it’s early enough in the game that most of the profits are still well off into the future.

Frontier markets are not to be confused with emerging markets, which include such places as China, India, Mexico, and Chile.

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Frontier markets are undeveloped countries like Kazakhstan, Vietnam, Croatia, and Ghana, where economic growth has only recently begun to sprout.

While generally more risky than emerging markets, they hold far more potential.

“The frontier markets still remain undiscovered,” Jack Ablin, Chief Information Officer at BMO Private Bank, told Yahoo! Finance’s Breakout. “I believe the frontier now is where emerging markets were 13 years ago.”

Frontier markets may not go unnoticed much longer…

Investing in Frontier Markets: Where to Look

As a group – which includes anywhere from 25 to 36 countries, depending on who you ask – the frontier markets have significantly outperformed emerging markets over the past 12 months.

A comparison of the MSCI Frontier Markets and Emerging Markets Indexes shows that while emerging markets have been volatile, with less than a 1% gain to show for it, frontier markets are up more than 15%.

Frontier markets

This is a reversal of a long-time trend; up until this year, emerging markets consistently outperformed frontier markets.

“Right now frontier is very exciting,” Mark Mobius, executive chairman of the Templeton Emerging Markets Group, told CNBC. “These frontier markets, particularly in Africa, are growing at a tremendous pace… this is the place to be at this stage of the game.”

Why Now Is the Time to Be Investing in Frontier Markets

 Investing in frontier marketsWhile the idea of frontier markets dates back 20 years, outside money has not been pouring into these countries… yet.

That’s because many of these countries carry higher risk as a result of political corruption and violence, and their markets often suffer from a general lack of liquidity.

All those factors tend to scare away investment, but the lack of foreign capital is part of what makes investing in frontier markets nowsuch a big opportunity.

“I particularly like frontier markets because they are not as mainstream as emerging markets and therefore not as sensitive to hot money flows and investor sentiment,” Ben Seager-Scott, senior research analyst at Bestinvest, told Investment Week. “When investors go into risk-off mode, they pull money out of EM, but that does not happen in frontier.”

The other benefit to the low rate of foreign investment is that it has helped keep stock prices low despite remarkable growth.

Many of these economies are already growing at a healthy clip. Gross domestic product (GDP) in frontier markets averaged 6.9% in 2012 and is forecast to rise to 7.2% this year.

But unlike the case in most emerging markets, that strong growth has not been reflected in frontier market stock prices.

“This has led to unbelievably low valuations for these markets, which are trading at a huge discount to stocks in the Philippines and Indonesia, for example,” Thomas Hugger, chief executive officer and fund manager of Hong Kong-based investment firm Asian Frontier Investments, told CNBC.

That just leaves the question of how retail investors can get frontier markets in their portfolios…

How to Invest in Frontier Markets

As with anything that promises big returns, investing in frontier markets is without doubt more risky than investing in U.S. stocks or even emerging markets.

That means investors should not go all in with frontier markets, but limit any investing to 10% or less of their portfolios. It’s also a good idea to spread the risk among multiple frontier markets as a hedge in case things suddenly turn south in one of them.

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  1. Cho Zenwan
    September 14th, 2013 at 16:32 | #1

    Frontier markets (FM) could represent 10 % of a diversified portfolio and can be subdivided into two distinct markets, the oil rich and the not oil rich. The oil rich markets would include the Gulf States or members of the Gulf Cooperation Council (GCC). The GCC can be bought in a single ETF like MES and could reasonably make up 5% of a diversified portfolio. An ex GCC ETF or a selection of favorite individual FM country funds could reasonably represent the other 5% of a diversified portfolio with 10% allocated to FM.

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