Frontier Markets Developing Fast as Funds Seek Higher Returns

(Bloomberg) -- The world’s least-developed markets with almost $700 billion in market value are starting to win back investors’ love.

Frontier equity markets are luring more money from investors as their growth prospects outweigh their market sizes and lack of liquidity, according to David S. Grayson, co-founder of New York-based stockbroking company Auerbach Grayson & Co. LLC.

Weaker links to international capital markets have helped shield frontier economies from any global pullbacks, driving their combined market value above $700 billion for the first time in a decade in January. Assets managed by dedicated frontier-equity funds have more than doubled since 2010 to $18.5 billion at the end of 2017, according to data compiled by EPFR Global.

“It’s like a new asset class,” Grayson, whose company specializes in emerging and frontier markets, said in an interview in Singapore. “What we’re seeing also in the last five years is you have traditional fund managers who never got involved in frontier markets who’d started frontier funds as part of their family of funds because their clients have come to them and say we want exposure.”

Below are some of Grayson’s views he shared at the interview:

What are the risks and rewards for investing in them? 

  • People are willing to take that risk and put a tiny bit of their portfolio to work in some of the frontier markets. Frontier markets are seen overall to have much more growth than developed markets, Grayson said
  • Low-income developing nations will expand at more than double the pace of advanced economies in the coming years, according to forecasts by the International Monetary Fund released last month:
    201920182017
    World Output3.9%3.9%3.7%
    Advanced Economies2.2%2.3%2.3%
    Low-income developing countries5.3%5.2%4.7%
  • The limits they face is that there’s not a lot of capacity and liquidity, Grayson said. At some point you reach capacity and you can’t invest any more money. At the same time, when the market gets hit, you see less money coming out of them

What are your top picks in frontier markets?

  • Myanmar, Ghana, Vietnam and Argentina are among Grayson’s favorite markets, he said
  • Myanmar, which has a population of more than 50 million, is similar to Vietnam 30 years ago; it’s gone from a mobile phone penetration of 1 percent to 90 percent in three years and it has a young entrepreneurial population
  • Ghana has a new president and a finance minister; it’s growing 6-7 percent and is a safe place to visit
  • Argentina under President Mauricio Macri is going through tremendous tax reforms

Are there any currency risks in these markets?

  • “The FX plays a very small role unless you’re talking about a country where it’s tough to get the money in or out.” Examples are Zimbabwe and Nigeria
  • In general, investors who go into frontier markets tend to be frontier-market funds. Except for the markets where it’s a problem, FX risk is incorporated in their mandate

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