Investing in Super Frontier Markets

Frontier Markets have gone mainstream over the past decade as international investors have backed countries such as Vietnam, Kazakhstan and Pakistan. But there are other nations which remain well off the radar to all but the most intrepid investors, places like Somaliland, Myanmar and Laos.

These countries have often been traumatised by conflict or decades of economic mismanagement. Investing in these countries can seem like a crazy idea. The lack of investable opportunities and risk of losing everything far too high. The danger of losing all or some of an investment is indeed high, money is lost through expropriation, fraud or wiped out by currency depreciation on a regular basis.

Reality Gap

But very often there is a reality gap concerning super frontier markets. This means that the perception of risk is higher than the actual risk. This is because even well informed investors will perceive a country as highly chaotic or violence prone, even as the reality on the ground is completely different or rapidly changing for the better. This gap in perception offers an opportunity for those willing to invest early before others catch on. Backing a market at this early stage can bring rewards as a country enjoys post conflict recovery or strong economic growth thanks to reforms or perhaps newly opening up to foreign investors.

What kind of investments?

While backing super frontier markets might seem a good idea, identifying opportunities is difficult. In most countries you buy shares in the stock market or purchase an ETF focused on that market or region. But many post conflict countries lack this institution, or if it does exist has just a few highly illiquid shares listed. The other avenue is via direct investment into a local business via a partnership with locals or other outside investors.

Other opportunities may arise to the well informed. the opening of a new stock market, changes in laws to welcome international investors or simply the winding up of a conflict and the reasonable certainty that it will not reoccur could be the spark that will make an investment worthwhile.

The risk here is lack local of knowledge which could result in losing the investment as local laws fail to protect outsiders or conflict, economic chaos or natural disasters strike. This is why the most common form of outside investment is done by returning diaspora members. Alternatively multinationals that have the power to protect their investment and pressure governments and legal systems that threaten them.

This healthy fear is why many super frontier markets remain dependent on foreign aid and development banks for their investment needs.

Political Risk Factors

As with frontier and emerging markets local politics and geopolitical concerns should be at the forefront of investor’s minds. Government action can define an investment environment, attracting or repelling foreign investors, stimulating or destroying local businesses, staving off or initiating a new round of conflict. Fragile states are also more prone to influence from overseas, weak states are more malleable, countries like Yemen and Syria have seen their long running wars operate as proxies for regional powers.

The upside to investing in these countries is the rapid growth which is possible assuming conflict is kept at bay and economic forces do not rederail recovery. Countries like Ethiopia, Turkmenistan, Rwanda and Laos which are either borderline frontier market or pre-frontier have enjoyed high (often double digit) economic growth rates in recent years.

In the past growth for many post conflict / frontier markets was driven by agriculture and commodities, but now there are many other opportunities to pursue which can stimulate economies.

The Promise of New Technology

Advances in telecommunications have opened the door and allowed easier communications in emerging economies, while applications like mobile money have shaken up the financial sector. Another major change afoot is ever easier access to renewable energy thanks to falling costs which will provide safe, cost effective sustainable energy to millions of people who previously had none.

Many of today’s super-frontier markets will morph into frontier markets and then emerging markets, others will get stuck and struggle to stimulate growth and investment. The art is identifing the most attractive investments in the countries that sustain their growth over the long term.