Skip to main content
May 08, 2011

Frontier markets tempt investors

Bold investors see potential in the frontier markets of Côte d’Ivoire, Timor-Leste and Egypt

A decade or so ago, Wall Street regarded emerging markets as a single amorphous entity. If there was trouble at one end of the globe, you sold all across the world. Those markets have now emerged as Asian Tigers and BRICs (Brazil, Russia, India and China), a better investment than the troubled Eurozone and US. And spreading beyond the BRIC boundaries are the ‘frontier markets’ where investors desperately seeking alpha boldly go where no one has gone before.
IR magazine decided to look beyond the final frontier, where only the brave venture –and found there are more of the brave than ever before. ‘The level of investor tolerance is much higher, even though the impact of risk is no less,’ says Anne Fruhauf, Eurasia Group’s Africa analyst. ‘There is more willingness to differentiate in their investment and be much more tolerant of risk, looking more seriously at different sub-sectors that could be safer political bets.’
She cites Côte d’Ivoire, the former jewel of Francophone Africa, where the defeated presidential candidate was forced from power by a combination of the opposition, the French army and the UN. Rather than cutting and running, investors seem to be channeling Rudyard Kipling, keeping their heads, when all about them are losing theirs.

‘From the sidelines, investors are very interested in, for example, the Côte d’Ivoire Eurobond, which had a very attractive yield last year, before the big crisis,’ explains Fruhauf. ‘The most risk-averse investors took their money out before the second round. Others, the old Africa hands, took their money out at a high, to buy back in at a low. Some people have been trying to stick it out, but they’re wondering how long to stick.
‘The longer-term view they are taking is very instructive. There are lots of investors actively monitoring and ready to pounce back in the moment they see some kind of improvement. Côte d’Ivoire shows how vulnerable every sector is to severe political instability, but then the question becomes: how deep does the crisis have to be to completely derail things?’
Set against the political instability is, of course, the worldwide commodity boom. Côte d’Ivoire produces not only wobbly governments but also oil, coffee, cocoa and metals, all of which, Fruhauf points out, ‘are on a roll.’
‘The last two or three years, there’s been a lot of reengagement, reports from the IMF and World Bank that tended to stabilization and attracted people beyond the traditional cocoa sector, such as small and medium miners and a new kind of investor,’ Fruhauf adds. ‘Even Indian car manufacturer Tata was looking at the country.’
The West’s sweet tooth for chocolate has helped to keep things ticking over, she continues. ‘Despite sanctions, conflict in the main cocoa growing areas and the outgoing president’s attempts to seize assets, the harvest has been quite good and the cocoa is trickling out, a lot of it smuggled. Our information from Abidjan is that, provided the situation is resolved in three months, the total harvest might not be that bad.’ And of course, oil production continues, as it seems to in all circumstances short of all-out war.
Conflict constraints
At the February investors’ conference for Timor-Leste in New York, it was clear this region was beyond the event horizon for many investors. One banker who wandered in to hear the country’s prime minister speak asked whether it was in Africa; it is not. The ex-Portuguese colony was occupied by its western neighbor, Indonesia, for decades. It definitely has location on its side: south of Singapore, north of Australia and directly above major oil reserves, which have been swelling its newly established sovereign wealth fund (SWF).
Timor-Leste is the blankest sheet for economic development, with little in the way of production apart from offshore oil, although its coffee is in demand since it is the ultimate in organic, picked from wild-growing bushes. Eurasia’s Ian Bremner also sees the potential. ‘Timor-Leste is a potentially rich country and there’s no reason why it can’t take its place with other frontier markets,’ he says. ‘But it’s pretty much out of sight for the financial markets, with no active and developed capital market. It’s somewhere we would look at certainly, but it’s not uppermost in our mind at this stage.’
Jeff Gold of JI Associates in New York is made of sterner stuff and sees advantages in Timor-Leste’s lack of development. ‘It could be a clean slate, sustainable take-off economy, rich in energy, water and fisheries, with potential specialties in green agriculture for domestic consumption and export,’ he notes.

Adrien Corbett of Porthaven Capital in New York sees other advantages. The SWF now stands at around $8 bn, and the government’s fiscal position is so sound it cannot even spend its revenues. Corbett sees the fund as a way to avoid inflation, corruption and the other deleterious consequences a flood of oil can entail for an ill-prepared nation. He is attempting to introduce adventurous investors from Asia and the US to the new country, while working with the government to ensure the projects are conducive to sustainable development.
Egypt remains attractive  
If Timor-Leste is a blank sheet, Egypt is a blotted copybook. It once ranked first among North African countries and second in Africa overall for inward foreign direct investment, according to the UN’s World Investment Report 2010. Then came Tunisia and the wave of Arab revolt that moved Egypt’s immoveable President Mubarak. Cairo’s bourse closed in the midst of apparent chaos and capital flight – allegedly, regime supporters trying to cut and run with their gains. By contrast, when the stock exchange reopened at the end of March, it dropped less than 9 percent and rapidly recovered.
Even during the troubles the new government began coordinating officials and business people to promote inward investment in Egypt. There was even a Twitter campaign to buy stocks to show solidarity. The Templeton Emerging Frontier Markets Fund had 6.9 percent of its assets in Egypt at the end of January. ‘We still rate it very highly: in fact we’re investing more money in it,’ says Templeton president Mark Mobius. ‘It is one of the most populous countries in that part of the world and has a very dynamic economy with a big group of young intelligent people who can move growth upwards.’
While Egypt has little in the way of natural resources, Mobius notes it has ‘lots of people, who have cell phones, who use banks and buy consumer goods produced and sold by companies we are interested in.’ Far from the unrest being a negative factor, he considers the changes ‘a plus, since Egypt broke with the bureaucratic and sclerotic path it was taking in the past. It has always been open to foreign investment, and so far it looks pretty good.’
Taking a step back, Mobius, a renowned trekker through frontier markets, says about the new breed of bold investor: ‘People are quite sophisticated these days and just because there’s been political upheaval doesn’t mean everyone heads for the hills anymore. We saw that in Thailand and other places, so it’s no longer something we have to worry about. People who were risk-averse always used to head for the dollar and US treasuries, but that’s no longer the case.’
And as a salutary reminder for such frontier investors, Mobius recommends skepticism concerning official data. ‘Like similar countries, the statistics tell you one thing but on the ground there’s a very big black or gray economy, so there’s a lot of opportunity there.’ For the bold explorers, that is.