Increased Investment in “Frontier Markets”

Source: Financial Times

Investment experts are beginning to see a shift from a focus on emerging markets such as China and India to frontier markets found in the Middle East and Africa. For instance, emerging markets have seen a net outflow (withdrawal of funds) of $22bn while frontier markets have seen a net inflow (investment) of over $1.3bn. It will helpful to explain what the terms emerging and frontier markets mean.

The term emerging market is used to describe countries that are experiencing rapid industrialization. Countries that experts consider to be emerging markets are thought to be in a transitional phase between developing and developed countries. Typically investors put money in these emerging markets because they promise high growth potential and short term gains for the investors.

Frontier markets, on the other hand, are usually smaller, less accessible countries in the developing world. These countries have not yet experienced the rapid growth of emerging markets yet are stable enough for investors to put money into their markets. Though the term frontier market is not constrained by any geographical area, the majority of these markets are located in Africa and the Middle East. It might be helpful to think of frontier markets as “pre-emerging markets” – markets that will eventually reach the level of growth and development of established emerging markets.

As early as the beginning of this year, emerging markets were seen as safe havens for international investors and a source of high returns. However, as emerging markets like China and India experience increased inflation and falling equity markets, investors are shifting money into frontier markets. While emerging markets offer short-term returns, investors in frontier markets are looking for more long-term growth prospects. Frontier markets cannot accept the quantity of investment that emerging markets can sustain, but these markets are less susceptible to global fluctuations such as the current credit crisis. As frontier markets in Africa and the Middle East become more stable and develop more industries experts expect investment to continue to increase.

Questions:

Frontier investments are often long-term investments. Does this mean that there is less risk associated with these types of investments or does this reflect the different types of industries that exist in frontier markets?

As more money flows into frontier markets will this spur social and political change in countries that have not gained a level of stability to be considered safe frontier markets? For instance, if Zimbabwe sees its northern African peers benefiting from foreign investment will this encourage Mugabe to clean up his act? Will stable neighbors help other countries reach a higher level of stability themselves?