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There has been a debate going on for many years, the true value of investing in frontier markets. The results of investing in frontier markets seem inherently leveraged when compared to the results of investing in the more steady paced developed markets. While people with safety as the forefront of their current investment philosophy may not have any desire to invest in these markets, the intelligent investor with the time and knowledge to invest for the long run can benefit greatly from investing in the frontier. I believe that right now is a good time to put money down for the long run in these growing markets.
Clayton recently wrote a blog post on the downsides to investing in frontier markets, the two main ideas in his argument being illiquidity and political unrest. Understandably, someone who has little heart or the ability to withstand volatility should view these two items as more than enough not to invest. However, as the world economies become more and more intertwined, foreign investment in these countries will grow, increasing liquidity. In addition, with time and new foreign funds/interests at stake, the political atmosphere of most frontier markets should start to stabilize.
Whether or not this vision seems far-fetched, the possibilities and probabilities are there. The majority of frontier markets have large amounts of resources that are underutilized. The majority have large amounts of natural resources, but others have large amounts of labor and excel in manufacturing and production capabilities. Nigeria, for example, is already the world's tenth largest oil producer. The bases of these economies are already known, all it takes is some concentrated investment to reap the benefits of these frontier markets.
In comparison to developed and emerging markets on the MSCI (When compared to the net world index for both emerging and developed markets since May 2002, the start of the FM index. Click the first FM index to get to the graph), the frontier markets more than hold their own. Against the developed nations their track record is much better; against the emerging markets they seem to have less volatility yet very similar results. I will put in a disclaimer that the recent financial crisis definitely left its mark on both emerging and frontier markets. On the other side of the coin, this can be viewed as a second chance to invest while the prices are still low. The fact remains, gaining a part of the first mover advantage by investing in one of these markets can and will reap great benefits as long as the informed investor has the time and resources to weather the frontier market.
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