Frontier Markets

Frontier Markets: The Next Big Investment?


Author: Marisa Elias
Date: October 15, 2014

Earlier this month, StarTimes, a privately owned Chinese media company, expanded to the Democratic Republic of Congo. The operator plans to widen its digital broadcasting network across the continent. It doesn't have far to go with a subscriber base of 1.5 million by December 2013, according to a report from Dataxis, StarTimes should reach its goal of 2 million by January 2015. StarTimes is taking advantage of an uncompetitive market with a growing consumer base. It's not alone.

The last few years have noted an increased corporate focus on so-called frontier markets. With underdeveloped capital and investable stock markets, frontier markets have typically attracted investors seeking high returns and able to bear high risks. Now larger firms, such as StarTimes, seek footholds in these markets. Frontier Strategy Group (FSG) suggests firms are placing more and more frontier markets on their watch and investment lists. Morocco is one such market. The last few quarters have seen double-digit growth in the automobile industry and consequently increased exports of automobile parts to European factories. Morocco hosts a relatively stable political environment and an abundance of cheap labour, attracting nearby European investors

But North African countries are not the only ones on the list. In fact, Sub-Saharan and East Africa dominates FSG's recent Sentiment Report. Progressing globalisation and shifting global power dynamics have caused firms to rethink investment strategies. While the largest developing nations witness increasingly slowed growth rates, frontier markets are beginning to grow. Recent oil discoveries and vast quantities of natural resources, often untouched due to a lack of technology and business, appeal to expanding investors. Nations with frontier markets tend to have low debt-to-GDP ratios. Often thought of as being in poor fiscal shape, a low ratio implies lower debt burdens, allowing economies to add stimulus whenever and wherever needed. During an economic downturn, they could quickly stimulate growth. Furthermore, the currency of many frontier markets is less volatile than commonly thought it's pegged to the US dollar.

Arguably, firms should avoid frontier markets, particularly in light of recent headlines. But, as Matt Lasov, FSG's global head of advisory and analytics, discusses for the Wall Street Journal, the Ebola outbreak, while "affecting short-term headline growth rates, is also temporarily changing the structure of affected economies, boosting certain sectors. In Nigeria, for example, aviation, hospitality and tourism are suffering, but e-commerce has benefitted." Restructuring frontier markets, many of which were not well structured to begin with, may end up being more beneficial than not. The nations may very well develop a comparative advantage in some unforeseen industry (or at the very least expand the market), drawing increasing numbers of investors and firms and spurring the national economy.

Frontier markets may have underdeveloped capital markets the very definition suggests it but they do not lack investor appeal. Investors can easily harness and manipulate resources, allowing for high future returns, and need far fewer improvements to stimulate growth. In some ways, a frontier market resembles a blank canvas investors develop them to their specifications. As the FSG report suggest, frontier markets are poised to become the new centre of economic investment.



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