Is the frontier market still too wild and risky?
It's tempting to seek large returns in volatile sectors – but be careful, warns Emma Dunkley
Sunday 11 December 2011
As Europe sits on the cusp of recession and the UK faces years of low growth, the prospect of investing in a Western economy for stellar returns seems fanciful at best.
As sentiment on the region plunges, more people are turning to the likes of China and those countries dubbed as emerging markets to buy shares, according to a survey by Baring Asset Management.
But emerging markets have come a long way in the past 10 years and are spearheading the global economy to the point where they are no longer fledgling markets facing a teenage growth spurt.
If you are kicking yourself for not investing in the budding emerging markets a couple of decades ago, "frontier" markets such as Kuwait or Kenya are now being touted as the next generation. Between 1992 and 2007, these markets actually had higher rates of growth than the broader emerging markets, at around 12 per cent a year compared with 9 per cent.
"These economies are in the early stages of development, where capital markets have been opening up and there is strong growth potential," says Meera Patel, senior investment analyst at Hargreaves Lansdown. "Frontier markets are at a stage where many of today's popular emerging markets were 10 to 15 years ago."
Although frontier markets have soared over the past two decades, many people are wary of these new kids on the block. They tend to behave differently from developed markets, which can be considered an attractive quality, given the weak outlook in the West at the moment. Ben Seager-Scott, a senior analyst at Bestinvest, says: "Of course, investors need to be aware that these are risky investments and political risk remains high, brought into sharp focus by the various uprisings we saw in this region earlier in the year."
With many of the frontier markets based in the Middle East and Africa, such risks as the Arab Spring remain evident, although there are others lurking beneath the surface. In 2009, fund manager New Star wound up its Heart of Africa trust, and investors lost a sizeable chunk of their money.
Part of the problem leading to the fund's demise is the less mature nature of these markets, and the difficulty this causes when trying to buy or sell certain shares in the region. Patrick Connolly of AWD Chase de Vere says: "The increased volatility and greater risks of investing in frontier markets over recognised emerging markets, with poorer infrastructure and corporate governance, illiquidity and increased political risks, makes them unsuitable for the overwhelming majority of investors."
The thought of buying into frontier markets to make a quick buck would certainly be erroneous. Ms Patel says: "Investors need to remember that these are less developed markets and growth may be achieved over time, but with potential bottlenecks along the way." Among the possible stumbling blocks include a lack of adequate regulations in the country, and fluctuating exchange rates.
But for those who are insistent on seeking potential growth over the long-term via frontier markets, collective schemes are one of the best routes. Investment trusts are one of the most popular products in this space, as they have the scope to invest in smaller and harder-to-trade stocks.
However, rather than buying a fund that invests solely in these countries, there are funds which also have exposure to the broader emerging markets, which can help to dilute exposure to any potentially risky area. Ms Patel says: "I would suggest investors gain exposure to the higher risk markets via an emerging market fund. If risk appetites allow, then a very small exposure to a dedicated frontier markets fund could be an option."
You don't even have to buy into these markets directly to gain access. Ben Willis, head of research at Whitechurch Securities, says a lot of frontier markets are rich in natural resources, so investors buying a commodities fund, say, could gain exposure to these countries via this route. "In addition," he says, "many of these global resource funds invest in developed-market companies whose operations are based in frontier markets."
Despite a shift in sentiment towards the emerging markets, people are not necessarily allocating a greater proportion of their assets in favour of these frontier countries. A lot of people are shying away from equities, as witnessed by the extreme swings in stock markets this year. "Many investors are being forced into equities for yield and growth reasons and are begrudgingly accepting the risk that this entails," says Mr Willis. "However, most are still uncomfortable with taking on excessive risk, and the wide perception remains that investing in frontier markets equates to very high risk."
In a climate where the sovereign debt crisis still rages on in Europe, many people are becoming even more risk-averse, erring on the side of caution. And even though the broader emerging markets have been on the radar for the past couple of decades, it is only recently that people have become more comfortable with investing their money in them.
Ms Patel says: "It will take some years before investors are confident enough to increase their allocation to these specialist funds."
Many advisers think that investors should have less money than in the past in the UK, Europe and the US, with a greater proportion invested in emerging and frontier markets. But investors who may need their money at relatively short notice – if, for example, they are close to retirement – are still recommended to go into less volatile investments such as UK equities, bonds, or even cash savings accounts.
Emma Dunkley is a reporter at Citywire.co.uk
Meera Patel, Hargreaves Lansdown
"Investors should be aware of the risks [of frontier markets], such as lower levels of liquidity, political and economic instability and lack of adequate regulations. If in doubt, I believe investors may wish to consider a broader emerging markets fund which could offer some exposure to the smaller frontier markets."
In the vanguard: the frontier funds
HSBC's research forecasts that by 2050, the size of emerging market economies will increase fivefold and will be larger than the developed world. The main funds operating in these areas include:
Investec's Africa & Middle East fund
Return: Around 18 per cent in the past three years. Manager Roelof Horne. Aims long-term returns via equities of firms based in Africa or Middle East, or which derive a significant revenue from the region. Exposure Nigeria, Egypt, UAE.
Templeton Frontier Markets fund
Return: 35 per cent over three years. Manager Mark Mobius, above. Aims to deliver long-term returns by investing mainly in equities of firms in the region, or that have principal activities there. Main exposure Nigeria, Vietnam, Kazakhstan, Qatar.
BlackRock Frontiers Investment Trust
Formed a year ago. Manager: Sam Vecht.
Schroders Frontier Markets Equity fund
Launched 2011. Managers: Allan Conway and Rami Sidani.
HSBC Global Asset Management's GIF Frontier Markets fund
Manager: Andrea Nannini.
Independent Partners: See how much you could save by switching credit cards. Compare now
Geoffrey Macnab reviews American Hustle, also starring Christian Bale and Bradley Cooper
newsFormer soldier taped 33 of the animals to the floor and then stamped on them one by one
Michelle Nijhuis' daughter insists (s)he is, and she learnt a valuable lesson on gender in books
news Opponents claim it would stop performers such as Beyonce and Madonna appearing on TV
It takes a platoon of chefs, litres of brandy and rum, and almost 100kg of dried fruit
food + drink
- 1 America's 'virgin births'? One in 200 mothers 'became pregnant without having sex'
- 2 Sun will 'flip upside down' within weeks, says Nasa
- 3 Christmas comes early: Justin Bieber is 'retiring from music'
- 4 Iain Duncan Smith leaves Commons food banks debate early
- 5 Children evacuated from swimming pool after prosthetic leg mistaken for paedophile
Exclusive: Young people ‘want UK to stay in Europe’: Four in 10 adults aged 18 to 24 are ‘firmly in favour’ of membership, poll shows
Tom Daley ‘is gay because his father died’ says UK evangelist
Iain Duncan Smith leaves Commons food banks debate early
Kiss and yell: Italian protester charged with sexual assault after kissing riot police officer
PM denies two child limit for benefits is part of Tory welfare policy
Anachronistic and iniquitous, grammar schools are a blot on the British education system
- < Previous
- Next >
iJobs Money & Business
£500 - £650 per day: Harrington Starr: Harrington Starr is working with a Glob...
£27000 per annum: Harrington Starr: Junior Consultant (Excel, Financial Spread...
£500 - £600 per day: Harrington Starr: .NET Quantitative Developer - Contract ...
£55000 per annum: Harrington Starr: Technical Operations Analyst (UNIX, Linux,...
Day In a Page
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A Grade II-listed home with six bedrooms, secluded landscaped gardens and views across Hadley Green
A Grade II-listed mansion with two apartments and a cottage, near Gretna Green
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden
A spacious Grade II-listed family home with annexe and equestrian facilities among four acres of land in Itchingfield
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town
A charming five-bedroom detached family home, set within half an acre in Kew
A two-bedroom maisonette set on the top two floors of a period building, close to Kentish Town Tube.
Take advantage of the extra space provided by former stables and outbuildings at this five-bedroom farmhouse.
This three-bedroom Victorian terrace is near to Queen’s Road Peckham station, Nunhead station.
A five-bedroom modern house with terrace, swimming pool, Zen treehouse and large carp pond
An unexpected gem with four bedrooms, remarkable vaulted reception and a galleried study area
A five-bedroom house in one of Lymington's most sought after tree lined avenues, moments from the marinas and sailing clubs
A grand early 19th century B&B close to the historic harbour, with four en suite bedrooms
A four-bedroom, 17th century home with walled gardens, a landscaped terrace, cellar and open fires
A six-bedroom house with five bathrooms and four reception rooms spread over 4,000sq ft of luxury living space
A stunning three double-bedroom apartment with two decked terraces in the exclusive gated community, Bromyard House
A 10-bedroom period, family home amid beautiful surroundings in the centre of the Wentworth Estate in Longcross village
A stylish three-bedroom apartment with two bathrooms and private landscaped garden, moments from Fitzroy Square
A Grade II-listed Elizabethan barn with landscaped gardens, exposed elm beams and four bedrooms, all with lovely views
A six-bedroom family home, dating back to 1280 with four reception rooms, barn, swimming pool and tennis courts in Harwell
A spacious two-bedroom flat, refurbished to a very high standard with private landscaped garden, close to Kentish Town station
An exceptional two-bedroom apartment with balcony and underground parking in the centre of Richmond
A one-bedroom, luxury, duplex apartment in the grand landmark building, Imperial Hall
Run a fabulous boutique shop, live above it in a one-bedroom flat and let a second one-bedroom flat that comes part and parcel
A Grade-II listed, thatched cottage in Hundleby village, with five bedrooms, a coach house and three and a half acres
A spacious two-bedroom flat in the heart of Hoxton Square with wooden floors and roof terrace
A five-bedroom family home with stunning pool and gym complex set among two acres of land
A six-bedroom period house with heated swimming pool and a separate two-bedroom annexe cottage in Townlake, £795,000
A spacious and contemporary two-bedroom flat arranged over three floors, with garden patio close to St George Square, £600,000
A one-bedroom flat in a beautiful Regency building opposite the beach in Kemp Town, £190,000
A two-bedroom flat with London skyline views close to Surrey Quays. £395,000.
A seven-storey tower with three bedrooms and a stunning roof terrace. Guide price: £850,000.
A 16-bedroom country pile with nine reception rooms, four self-contained flats and a 13th century Peel Tower. £850,000.
A classic six-bedroom Victorian Manse house 10 miles from Edinburgh. £495,000.
John Lennon's childhood home in Liverpool to be sold at auction. Guide price: £150,000-£250,000.