The Case for Frontier Markets – What they don’t tell you


The Case for Frontier Markets – What they don’t tell you

There has been a flurry of attention on Frontier Markets over the past year.  In particular, we have seen queries related to investing in the MSCI FM increase significantly.  Just by way of illustration, see the Google trends for Frontier Markets and MSCI Frontier Markets.  Unsurprisingly, interest waned in March and April when the developed market was doing well, and has waned in October.  However, since late 2011, the search activity is clearly increasing.

Coupled with this latent interest are news snippets such as Greece and Morocco being downgraded to the MSCI FM from the MSCI EM.  These changes will be effective as of November 26.  Though we do not know the weighting change to the index, we can surmise that it will aid in giving the MSCI FM slightly less ridiculous weightings, such as its 23% weighting to Kuwait.  The small focus of the MSCI FM is concentrated on the Middle East and Nigeria.  This index has performed quite strongly over the past year, leading to fearful articles such as this.   Our issues with the index are well known.  Over the past year it may have risen 18%, but as you can see on our dashboard, the overall market is only up 4%.

MSCI FM however, does hold sway, and it is the means by which most investors are introduced to the concept of ‘Frontier Markets.’  In that sense it is more important than ever and something that we will continue to track.  To that end, numerous heavyweights in the asset management industry have begun the long education process of their clients and potential clients about Frontier Markets.  Morningstar released a detailed piece here.  While informative, it does contain silly statements such as,

“while developed countries’ contributions have been tempered. Kuwait, Nigeria and Qatar, the three largest weights in the MSCI Frontier Markets Index, all saw GDP growth of more than 5% in 2012. By comparison, over the same time frame, the mean GDP reading for the G7 economies — France, Germany, Italy, Japan, the U.K., the U.S. and Canada — was 1.5%.”

Qatar and Kuwait, should never, ever be compared to any of those countries.  They have a combined population of4.7mm or the equivalent of Phoenix, Arizona.  The report does however go through a lot of what we have discussed, such as demographics in Frontier Markets and low correlations.  This report has a wide audience and one can expect fund flows to remain strong to the Frontier Markets’ countries that are easy to access and liquid.  This means that for stock pickers such as ourselves, the opportunities will become increasingly difficult to find in those markets, and we will have increase our focus on those markets that are less liquid and difficult to access.

Pension Funds Insider, has a similar report endeavouring to create wonder in its readers comparing Frontier Markets to the early days of Emerging Markets.  The demand is there, and as we highlighted last week, the ETFs are coming but they do not represent the entirety of the Frontier Markets’ universe.

Barrons did not want to be left behind either, but Barron’s provides some useful advice.  This is a short and useful read.

Valuations for Frontier Markets are difficult to come by, but what we do know, is that Africa as a whole has had a banner year, with equities up 33.3% in USD terms.  What is also noteworthy is that this growth has been strong in every market we track except Botswana.  Even Botswana though, is up 4.8% YTD.

Malawi has been the strongest market from those that we track, +62.7% in USD terms.  You would think that with this kind of return, the market would be frothy.  However, if you see the daily report, you can see that P/E ratios remain reasonable, with a weighted average P/E of 9.28 (as of November 14, 2013).  Similarly, Uganda is up +41.0% in USD terms YTD, and remains an attractively valued market, with P/E ratios at approximately 10.5.

Similar value can be found across multiple markets.  The lesson is pay attention to the flows that are coming into Frontier Markets, but also be aware of where that money is going.  What you are likely to see is that the funds are concentrated on a handful of the countries heavily weighted in the MSCI FM.  One thing investors ought to be cognizant of is that there are no similarities between Frontier Markets.  Africa is not monolithic.  Terms like ‘African growth story’ are meaningless, because they fail to identify the nuances of each country.  These nuances are not being recognized by the reports we have linked to above.  It is these nuances that provide investor opportunity.

On a last note, one website which may be quite helpful for gathering information is  They do not update frequently, but have a wide array of information that you may find helpful.

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