Whilst most asset allocators are making cautious predictions for 2011, some are calling for increased allocation to those emerging markets left behind by the BRIC euphoria. In particular, new emerging markets, or frontier markets, are fast becoming an investment theme in their own right.
Frontier markets represent some 4% of global GDP, around $2.5 trillion when combined. These off benchmark emerging markets are typically nascent economies that are just starting on the process of industrialisation. According to Daniel Broby, Chief Investment Officer of Silk Invest, this means that they will enjoy above average growth for the next 5 – 15 years if they get their act together.
A number of frontier markets have either new or established stock exchanges and the investment universe is far larger than most imagine. Indeed, only last week saw the launch of a new stock exchange in Laos. Countries like Iraq, Lebanon and Zimbabwe have sustained their exchanges throughout a decade of troubles. Thanks to greater use of technology, global investors can get access to such markets and benefit from the mispriced risk.
Although the immediate opportunity is in the public markets; private equity, fixed income, and property all offer attractive returns. A number of new funds have been launched to capitalise on this theme including the Silk Road Frontier Fund, the BlackRock Frontiers investment trust and Schroder ISF Frontier Markets Equity.
The frontier markets are particularly attractive to long horizon institutional investors. That said, these are markets where stock picking and local presence is a pre-requisite. Investors should look to have an overweight exposure and not market time. Investment risks include illiquidity and political surprise, but the returns of a expected returns of a diversified portfolio far out way these in the long run.