4 Reasons to be optimistic about Frontier Markets: electricity, water, toilets and food
2016 was not a great year for Frontier Markets. If one measures Frontier Markets by the MSCI FM Index, then 2016 was a big disappointment. In 2015, MSCI FM underperformed developed markets by -12% and in 2016 that difference was compounded by a -5% underperformance. Frontier markets continue to be walloped by global factors such as rising rates, currency volatility, and muted global demand.
However, the secular growth story of Frontier Markets is not only still valid but is in fact strengthening. 2017 will likely be the first year in many, where Frontier Markets will outperform developed markets. To that end, we wanted to remind people that these markets are structurally well-positioned for growth. It is easy to overlook this, in a world where risk seems to be at a heightened level. Be it Syria, Venezuela, North Korea, or Ukraine, there seem to be many areas of instability that are arresting development and growth in the Frontier.
Despite all of that, we think it is worthwhile to revisit the premise that makes Frontier Markets compelling. It may be 7 years old, but this presentation by Hans Rosling is always worth a watch when sentiment becomes overly negative.
We specifically looked at 5 metrics, % of the population with access to electricity, % of the population with access to clean water, % of the population with access to toilets, and the aggregate caloric deficit by country. Looking at the trends within these metrics, the global story is overwhelmingly positive. Not one country in the world has more hungry people or less access to electricity, water or toilets since 1990. This is remarkable. The ten countries which across all four-metrics exhibited the most improvement is highlighted in the figure below.
What is great is that these countries are amongst the lowest in the quality of life and GDP per capita. They have a long way to go and these incremental improvements have a profound impact on quality of life, productivity and by extension economic health. The countries with the least improvement since 1990 are no surprise, they had a high base to start with. The differences across the world in 25 years are highlighted in the figure below.
The world has enough food today. 48% of the world’s population lives in a country with a below-replacement birth rate, and the global fertility rate is now only 2.5 compared to 2.1 necessary for replacement and 3.0 in 1990. Without the concern of overpopulation for the world individual countries with population, issues can solve the problem through emigration without necessarily creating societal conflict.
Systemic improvements in these core ingredients for a growing economy will lead to exponential growth in the future. China’s Africa strategy may be flawed, but it is indisputable that the impact on infrastructure has been profound. It is for these reasons that we think everyone should be optimistic about Frontier Markets.
Data is from the World Bank and provided below.