The frontier is a concept laden with symbolism, especially here in America. The romantic notion we have of an unspoiled land, a place fraught with great danger and great opportunity, has captivated minds since they’ve existed. The potential for huge growth grabs our interest, while the many unknowns ought to scare away those with weaker dispositions.
While they’re not exactly the Wild West, today’s frontier markets i.e the smaller and newer emerging markets have the same balance of growth opportunity with a variety of pitfalls to be avoided. Also similarly, they have about them a number of myths and misconceptions that cloud perceptions of their real value. Here are a few myths about frontier markets that you shouldn’t let get in the way of your next big investment opportunity.
Myth #1: Frontier Markets Are Just a Lesser Form of Emerging Markets
It’s a simple comparison to make, but a flawed one. It’s easy to see why one can draw a line from the emerging markets like the BRIC nations to the smaller frontier markets and see the frontiers as simply a downsized, less progressed version. This may appear intuitive, but the numbers provide a different story. As mentioned in my book, Frontier Investor, when adjusted for real purchasing power, these frontier markets, as a group, make up 19 percent of global GDP. That’s an economy even larger than the United States, and four times the size of Japan. These markets are not the financial backwaters they may seem, but hold an ever-rising piece of the global pie.
Myth #2: Frontier Markets Jeopardize Your Portfolio
Like any investment with a certain amount of risk, frontier markets do carry with them some uncertainty. However, any properly diversified portfolio can easily subsume these potential dangers. The fact is that the rising consumer economies of these markets actually do not correlate as closely to those of developed economies as more established emerging markets do. Essentially, your money that’s invested in frontier markets will not rise and fall at the same rate as your money in more traditional markets, keeping your portfolio balanced. The diversification benefit is real. Let it work for you.
Myth #3: Your Returns Will Be Tied to Economic Growth
The explosion of the BRIC (Brazil, Russia, India, China) and larger emerging markets has led to an increase in interest in frontier markets. However, the opportunities in frontiers are decidedly different in that they aren’t necessarily linked to growth they way the old emerging markets were. Studies have shown that the correlation between return on investment and economic growth are near zero, and what matters more are the markets’ performance in relation to forecasts and valuations. Thanks to IMF projections of sluggish performance in developed markets, many investors are scrutinizing these performance metrics more closely by the day. Whether the countries are truly growing can be a sobering thought, but it truly won’t be the final arbiter of whether or not your investment is a successful one.
Myth #4: You’ll Need a Wait-and-See Approach
As with any kind of investment carrying risk (like most of them) frontier market investments will require some due diligence. What it won’t necessitate, though, is a passive attitude. It’ll be a bad idea to try to mitigate risk with an index. As set forth in my book, Frontier Investor, utilizing indices, while usually a safe bet, is a mistake in this instance. The fact is that these markets vary widely and frequently, with very low correlation between individual countries. What’s big one day might not be a sure thing for long and for this reason it’s better to be totally hands-on. This means paying attention to political developments in frontier nations as well as economic ones. If you’re willing to put the work in, frontier markets are without question a promising endeavor with the opportunity to pay out enormously.