FT Frontier Markets Summit 2014
The Project Firefly — Financial Times pilot program provides students with an excellent forum to share ideas with like-minded young thought leaders and participate in meaningful debate. Members are given a trial to FT.com and in some cases exclusive access to FT events, including the Frontier Markets Summit that I attended this month in New York.
First coined in 1992, the term ‘frontier market’ applies to a nation with an economy too small to be considered an emerging market. Such nations are fast growing with loosening investment environments and examples include Kenya, Myanmar, Estonia and Tunisia.
Much of the recent press has been negative on frontier markets, focusing on exchange rate depreciation, the decline in energy prices and (in West Africa) Ebola. On the surface, such news comes off as unsettling to readers and investors, but it’s important to note that frontier markets have had a decade of promising achievements on the structural front. At the summit, Deputy Managing Director of the IMF Min Zhu presented his case for frontier markets, noting an impressive savings rate, manageable debt/credit growth and strong competitiveness. In chatting with him before the presentation, he remarked that his views were ‘unconventional,’ speaking to the negative light frontiers have come accustomed to since 2008.
In some cases the negative press has been warranted. Although frontier markets as a whole performed well from 2002 through 2007, they failed to regain that performance post-crisis while emerging markets comfortably surpassed all time highs in the global hunt for yield. This fact has contributed to the recent ‘out of sight and out of mind’ nature to coverage. With financial reporting mostly focused on public equities, the private equity successes noted at the conference have largely gone under the radar in recent years.
Still, and as detailed in my energy post at Project Firefly, volatility suppression and low rates over the last five years have built up excesses that are not easily unwound. Frontier markets are no exception to that fact and dynamics of the current market could exasperate any sell-off, especially as liquidity dries up.
Still, when looking at an all-weather portfolio structure for the next 50 years over the next 5, frontier markets offer an attractive case. This is especially true when considering relative valuations in volatile times. As Everest Capital (a founding sponsor of the event) notes, when looking at frontier markets as a whole you have low multiples around 9 for attractive 20% growth rates. There are risks, but for those seeking above average returns in the long run, it is impossible to ignore the allure.
As capital markets become more accountable, investors will benefit from reliability. Hades Ibrahim of the Mo Ibrahim Foundation spoke at great lengths during the summit about accountability and how measuring it can benefit those seeking a lower risk profile. The foundation compiles data in order to form the Ibrahim Index of African Governance (IIAG) which looks at safety and the rule of law, human rights, economic opportunity and human development. On the Ebola risk played up by the media, Ms. Ibrahim wittingly noted Ghana’s closer proximity to London over Nairobi.
In making investments, market participants will undoubtedly have to perform or acquire more research than is the norm, but the FT Frontier Markets Summit highlights an incredible growth story being written from Nigeria and Oman to Myanmar and Bangladesh.