Here comes the main
hurdle, “why would anyone would invest in such inefficient frontier
economies?”, The most appropriate answer is that there are some of the
best-performing & enormously growing stock markets in the world. These
markets are generally located in countries like Bangladesh, Kenya, Argentina
etc. These high growth markets have been challenging the markets of many
emerging economies over the years; stock markets of these nations generated
returns approximately 19%, 24% and 52% respectively in the year 2014. We have
to also take into account that the previous performances of these markets do
not guarantee the same level of results, but, investors around the world are
ready to take a chance in these fast-developing markets.
The main concerns in
these markets are volatility paired up with interest rates, political instability
and currency inflation. The MSCI Frontier Markets Index increased to 19.26%
between 2012-2015, and faced a -7.64% decline for the MSCI Emerging Markets
Index over the same period. We will be looking at some of the most important
risks which are hindering the growth of these frontier markets
Ø Political & Sovereign
– The political institutions of these
nations are very instable as they are faced with terrorism, institutions
ineffectiveness, higher crime rates, less bureaucratic control in decision
making, protests, transparency etc. Due to the varied reasons many companies
are not able to take a big step in setting up their units in these nations.
Ø Volatility – The frontier markets are quite volatile.
But, the main point is these markets are so diverse and uncorrelated. As a
whole they much less volatile when compared to the MSCI Emerging Markets Index
(or) the S&P 500 Index in past few years. The low foreign
investors penetration in frontier-markets mainly in the stocks and bonds, it
can be said that this volatile moment can be of a short term and in the long
run it will benefit the nation, one should overlook this while investing for
long time periods.
Ø Fiscal Stability &
Corruption – As
said earlier the fiscal stability is not guaranteed in these markets and the
level of corruption in these countries is also at a high rate. Due to
corruption the ease of doing business is bought down and less investments are
Ø Liquidity – The
frontier market segment is very limited in size. Market capitalization of the
MSCI Frontier Markets Index was accounted to $313 billion. During the year
2014, the MSCI Frontier Markets Index traded nearly $328 million on a day. The
investors normally tend to hold money, for the long-term time frame and try to
mitigate their own risks through portfolio diversification. Huge liquidity can
be challenging for investors to build positions for long term in these frontier
Ø Restrictions imposed on
foreign investors – Few
governments of these frontier markets don’t give permissions easily to the
private corporations and try to impose high tax and don’t give the necessary
permissions until the leaders own wishes are satisfied. This is a huge obstacle
for the business people.
Ø Operational Complexity
& Costs – Due
to the relative immaturity of frontier markets, they pose huge operational
challenges. We must also take into account that the investing in smaller, less
liquid markets is almost always costly, when compared to the other markets. Currency
exchange rate also add costs to the government.
represent a high growth for the future years with a few risks coupled with it. these
risks are real and they should not be taken in a easy way, as they are very
important to build the future of these nations by tackling them efficiently. As
frontier countries develop, these risks should be mitigated with increasing
opportunity for market capital expansion over the coming years.
The return scope and diversification
of frontier markets has led us to begin a search for an active alternative
economy which help us to deploy capital into these nations. it gives a that
focus and deep familiarity with emerging markets are critical to manage the
risks and motivated us to harvest the rewards these frontier markets are offering.