Investing

Why you shouldn’t ignore frontier markets

Why you shouldn’t ignore frontier markets

Image: Second oil field discovered in Senegal.

 In 1949 Paul Getty, considered one of the richest people in the world, took advantage of the 1944 granting of prospecting rights to Americans by the Ibn Saudi, following the discovery of oil a few years earlier. Before his trip no oil had ever been discovered, and none appeared until four years had passed. From 1953 onward, Getty’s gamble produced 16,000,000 barrels (2,500,000 m3) a year, which contributed greatly to the fortune responsible for making him one of the richest people in the world.

“If you’re looking for secret fortune look where no one else is looking, the case for Africa.” – @CloudAtlas_AMI

 

While frontier market investments certainly come with substantial risks, they also post the kind of returns that emerging markets did during the 1990s and early 2000s. However, frontier markets comprise approximately 2% of global market capitalization and thus remain a very small slice of the global economy. Some economists also believe that the frontier market companies in Africa (which equates to the majority of nations on that continent) will experience the next major world economic boom in the same manner as the U.S. and Pacific Rim countries such as Japan. Recent research states that Africa’s sub-Saharan economy will grow almost 15-fold over the next 35 years, from $2 trillion to $29 trillion.

 

Cloud Atlas Investing has the world-first Frontier Markets Exchange Traded Fund, the AMI Big 50 ex-SA ETF. We show how even in a weakening Rand environment, the index to the fund performed exceptionally well as shown in the illustration below.

Source: Thomson Reuters

In contrast, looking at a Emerging Markets Index, there is clear and visible under performance so far this year.

Source: Thomson Reuters

Recent developments relating to Turkey have generated global risk aversion towards emerging market currencies and the strengthening of the dollar.

Source: JP Morgan Broad Currency Index

 

Emerging markets have endured a tough year and there seems to be no clear end in sight. Capital has also left in search of safe heavens and as one would expect, the performance of the respective stock exchanges has been nothing but poor.

 


Source: Thomson Reuters

Like emerging countries, frontier markets got their start in commodities. However, frontier markets have also evolved. Improved country fundamentals have provided market access to many frontier countries, and today, much of frontier markets growth is supported by the demographic dividend. Frontier markets are buoyed by a young population and future workforce, with a high ratio of working or soon-to-be working population relative to a current or projected retirement population.

When factoring in the large number of markets not included in indices such as MSCI, frontier economies (in their broadest definition) account for a neat 30% of the world’s population and around 10% of global GDP. Also, the individualistic and domestic drivers of frontier markets mean that each individual country is less likely to be influenced by another within the asset class.

Frontier markets have low levels of foreign ownership, and thus are less impacted by their more developed counterparts. Lower correlations to developed and emerging markets can provide additional diversification for investors, particularly during periods of heightened global market volatility.

Below is an image depicting the low currency correlation among African frontier markets currencies over a period of 5 years.


Source: Aberdeen Asset Management (Quantum), August 7, 2017

 

Lastly, these are some of Africa’s exchange indices as of 15/08/2018 with some dating as back as 5 years.

Egypt – EGX 30 gains of 186.73% since August 2013.

Nigeria – NGSE ASI gains of 26.39% since August 2016.

Zimbabwe – ZSE Industrial gains of 276.22% since August 2013.

Morocco – MASI INDEX gains 36.72% since August 2013.

Source: Thomson Reuters