Extreme Investing

The Frontier Markets’ Resurgence


Freetown, Sierra Leone

Photograph by Caroline Thomas/Demotix/Corbis

Freetown, Sierra Leone

As far as investing goes, the economic battlefronts of Europe, China, and the U.S. seem like the only concern.

Meanwhile, as if it could not care less about all that, Sierra Leone, the West African nation still shellshocked from years of truly horrific bloodshed, is building a stock market. Sitting on the corner of the edge of what they call the investing frontier—tiny, illiquid markets aspiring to graduate to emerging-market status and someday developed markets—the fledgling bourse in the capital of Freetown trades a single ticker for a total of four hours across two days every week. It wants to add another pair of listings and perhaps increase its hours as the economy grows a continent-leading 35 percent.

Southeast Asia’s Myanmar, long a rogue state that still ranks No. 180 of 183 nations in Transparency International’s corruption index, is suddenly open for business and maybe even democracy. Everyone, including Coca-Cola (KO) and Royal Dutch Shell (RDS.A), wants in. Dubbed Asia’s “next economic frontier” by the International Monetary Fund, the former Burma expects foreign direct investment to surge 40 percent this year to $4 billion. There’s a rush to build jetsetter-grade hotels in Rangoon.

Zambia just debuted a $750 million Eurobond. While the developed likes of Spain and Greece can’t find private takers for their debt, “around $15 billion of orders were apparently received for the [Zambian] issue,” analysts at Rand Merchant Bank wrote in a Sept. 14 report. “We expected the large interest due to investors eyeing riskier assets and the scarcity of Eurobonds in frontier Africa.”

And who better to bring it all back to your living room than BlackRock’s (BLK) iShares, which is launching what promises to be the go-to frontier markets exchange-traded fund. The mainstream-exotic experiment is essentially tantamount to McDonald’s (MCD) serving durian.

This boomlet defies traditional thinking: Frontier markets, it is widely believed, have no hope if emerging markets writ large are struggling—especially if China isn’t growing at full tilt. After all, who else would bid up all that newly mined Peruvian copper? And dictatorial Central Africa’s fossil fuels? Would there be much in the way of overflow labor demand in Vietnam if idled factory workers in Guangdong headed back to rural life? Recall how Asia’s late 1990s financial contagion hastened collapses in Russia and Latin America.

Of course, that largely forgotten emerging-market meltdown set the stage for the great decade of the BRICs—and their offshoots, the CIVETs and the N-11. The mid-to-late 2000s would have been a fine time to launch a ready-for-big-inflows frontier ETF. But for two years now, the U.S. has resumed an outperformance to emerging markets that it hadn’t enjoyed since the Clinton years.

There’s also confusion and impending dislocation in the space: In 2009, Argentina, once a darling among emerging-market investors, suffered a demotion to frontier status; perhaps the same ignominy ultimately awaits Greece, which is flirting with a downgrade from developed market to emerging market. Meanwhile, why hasn’t South Korea, home to such world-class brands as Samsung Electronics (005930:KS) and Hyundai Motor (005380:KS), yet been declared a developed market?

Cold-eyed investors might forgive these shortcomings in order to take advantage of frontier markets’ chief selling point: their offer of better diversification. Frontiersmen like Croatia and Bangladesh show a penchant for zagging when the rest of the planet is zigging in lockstep. In an increasingly risk-on/risk-off world, the MSCI Frontier Markets 100 Index correlated 65 percent with the movements of the Standard & Poor’s 500-stock index—well shy of emerging markets’ 84 percent correlation. Ten years ago emerging markets bought you a lot more diversification, when they correlated at just 57 percent.

Ten years ago was also the unlikely start to one of the great success stories in developing-markets history. That’s when a Marxist guerrilla group was at the gates of Bogotá, firing shells into the Colombian capital. But the new government and rule of law ultimately prevailed, and foreign direct investment slowly returned—then exploded as a normalcy took hold. Colombia’s stock market has since surged twelvefold. Its Medellín(!)-listed companies are the envy of Latin American investment bankers, and it enjoys affordable debt terms thanks to its investment-grade credit rating. Within a short decade, Colombia has gone from near-failed state to frontier curiosity to thriving official emerging market.

So keep hope alive—and the market open (longer)—in Sierra Leone.

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Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.

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