Where is the next investment frontier?

22nd August 2012

According to the Financial Times (paywall) a couple of fund managers take the view that Azerbaijan, positioned between east and west on the Caspian Sea and with a rich trading history, is an overlooked opportunity given that the government is instating a series of reforms.

The Beyond Brics blog adds: "There is no doubt that it has long term potential. In the 19th century Baku became known as the Black Gold Capital of the world and it remains rich in undeveloped petroleum resources."

Other markets with significant natural resource endowments continue to emerge as robust places to invest, which leads us onto Mongolia, whose biggest growth driver is its natural resources. It has large deposits of copper, coal, molybdenum, tin, tungsten, and gold, which together form about a third of its industrial production.

The Guardian comments: "If you were going to develop a commodity supply source anywhere – even today, when global commodity prices have taken a dip – it would be in this former Soviet satellite right next to China, the most resource-hungry market in the world."

The recent discovery of vast mineral deposits in the Mongolian hinterlands, some of which found their way into the medals awarded at the Olympic Games in London, is helping drive the country's progress.

Last year, Mongolia's economy grew by 17.3%, the fastest rate in Asia and almost double that of China. And while Chinese GDP is forecast to grow by 7.5% in 2012, the Mongolian economy is set to grow at a staggering 14.9%.

But despite the Mongolian success, it has not been plain sailing for those on the frontier as this MSCI chart shows.

And anyway, there are plenty of ‘frontier markets' frequently touted as investment opportunities. South Korea, for example, is richer and far more peaceful, and while Africa funds have often had a torrid time they maintain their compelling investment appeal, say advisers. Although beware of the risk.

On Africa, Darius McDermott, from IFA Chelsea Financial Services, says on his Mindful Money blog: "…the majority of countries in the region are still classed as frontier markets and investment is both risky and limited – stock markets are still to develop and can be illiquid.  There are also still plenty of political risks, regulatory issues and 55 very different countries which need to be understood thoroughly by anyone investing there.

"As a consequence, most professional investors still use South Africa as the main gateway to the rest of the continent – in much the same way as investors once used Austria and Germany to gain access to the emerging markets of eastern Europe. Direct investment into other African countries is slowly increasing but is still very much in the early stages.

"Africa may well be the next Asia, but it could take many years for this potential to be realised and there will be hiccups along the way."

So how would you invest anyway? Investors interested in owning Azeri assets therefore restricted to investing in private equity, as there isn't a stock market. An option is to buy shares of companies exploring and producing in frontier markets to benefit from growth, but this takes some investment experience.

Hot lists of new frontier markets are nothing new. Wesley Fogel and Michael Harris, analysts at Bank of America Merrill Lynch, produced a report on a hot new group of frontier economies, says Business Insider, which they say offer a "fairly significant and still overwhelmingly under-owned long-term investment opportunity."

The members of this elite group are Saudi Arabia, Qatar, United Arab Emirates, Kazakhstan, and Nigeria, which don't exactly lend themselves to a catchy acronym, unlike Brics and Civits.

Merrill Lynch in 2008 introduced a Frontier Index of 50 stocks from 17 countries in Europe, the Middle East, Africa, and Asia, with Middle East listings accounting for 50% of the index, followed by 22.6% for Asia, 14.1% for Europe, and 13.3% for Africa.

MSCI has also come up with its own Frontier Markets Index, covering countries ranging from Argentina to Zimbabwe and including such hotspots as Bosnia-Herzegovina, Jamaica, and Trinidad & Tobago.

So where the next ‘tip' lies is anyone's guess. But beware of risky and limited opportunities for profit if you intend to jump on the bandwagon.


More on Mindful Money:

Realities and myths of the Chinese growth miracle

Resource riches and commodity curses

Dubai: a leading global financial centre?

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