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27 March 2019 Financial Analysts Journal Book Review

Frontier Investor: How to Prosper in the Next Emerging Markets (a review)

  1. Marc L. Ross, CFA
Like their emerging market forebears, frontier markets present unique and profitable opportunities for those willing to do the hard work. A veteran of the emerging market and frontier market spaces, author Marko Dimitrijević, CFA, attempts to close the gap between misperception and reality regarding this part of the investment world. Not merely a primer on these markets, Frontier Investor offers a basic, succinct grounding in emerging market and frontier market attributes and the intellectual toolkit with which to approach them. Both experienced and novice investors will find the book’s reflections and guidance at once entertaining and useful.

Arriving in Brazzaville, capital of what is now the Republic of the Congo, in the early 1980s, a junior banker was struck by the high level of disorganization in the government ministry building and the surrounding neighborhood. Equally striking was the willingness of bankers to extend credit on unduly favorable terms to what looked to be a dicey enterprise. Such was Marko Dimitrijević’s introduction to frontier markets, where profits could be had by investors willing to eschew conventional wisdom.

A core tenet of Frontier Investor: How to Prosper in the Next Emerging Markets is that the study of frontier markets is necessarily the study of their macroeconomic environment. However, such study also requires a microeconomic analysis of company fundamentals. Indeed, the two approaches are complementary.

The organization of Frontier Investor lends itself to ease of reference and makes for an informative and engaging read. The author intersperses the narrative with case studies rich in anecdotes that reinforce critical concepts.

“Part I: Why Invest in Frontier Markets?” presents cogent arguments in favor of investing outside developed markets. A key advantage is that favorable demographics and low correlations with developed markets can offer value and diversification benefits.

Dimitrijević first addresses emerging markets, seeking to dispel common myths about them that investors harbor. For example, emerging markets have become larger, more interconnected, and more liquid than suggested by benchmarks that often underrepresent them. Moreover, emerging markets’ volatility is not always as severe as one might believe. The developed world’s reproach of emerging market countries for their fiscal and monetary policies in the late 1990s (think currency interventions and Asian markets’ prohibition of short selling in 1997–1998) rings hollow in the wake of the global financial crisis of 2007–2008, which saw the United States and other developed economies resort to the very same policies.

This section of the book is a study in both macroeconomic history and investment management. Indeed, the discussion of emerging markets’ numerous advantages provides important historical context. As emerging markets “emerge,” new ones replace them.

Enter frontier markets. The lessons of financial history are invaluable to investors exploring this asset class. Dimitrijević notes how Turkey’s evolution from frontier to emerging market status rests on the pillars of increased economic freedom and urbanization, improved infrastructure, greater wealth and a rising middle class, strong corporate governance, and robust stock market performance. The confluence of these attributes fosters the growth and evolution of frontier markets into emerging markets—though not always, as the examples of Sri Lanka, Pakistan, and Venezuela attest. In some cases, the inability of frontier economies to gain recognition as emerging economies results from their failure to meet index providers’ minimum thresholds for size and liquidity. Persistent classification as “frontier” influences investor perceptions, sometimes unfairly.

Improved fiscal management, reduced external debt, better-managed inflation, increased foreign direct investment, rapid growth, advantageous demographics (30%–40% of the world’s 15- to 34-year-olds reside in frontier markets), and global integration through enhanced technologies harnessed to education—all are at work in frontier markets.

Attractive value and portfolio diversification opportunities exist in frontier markets. Despite growing investor interest, they remain comparatively inefficient owing to lower ratios of market capitalization to GDP than in developed markets and sparse sell-side coverage. This relative neglect creates an investment advantage.

“Part II: How to Invest in Frontier Markets” explores the various ways investors can achieve exposure. These ways are affected by the markets’ varying degrees of opacity and efficiency. Passive investment is problematic because the benchmarks are often not reflective of the true universe. One example is MSCI’s 2014 decision to drop both Qatar and the United Arab Emirates from its Frontier Markets Index, of which they accounted for 30% of market value. In addition, the passive approach fails to capture inefficiencies that facilitate profitable investment in the space. Active management is a more worthwhile endeavor. It can include direct investment in local country equities, corporate bonds, GDRs (global depositary receipts), or ADRs (American depositary receipts); proxies, such as multinationals, commodities, or industries with significant frontier market exposure; or currency plays.

The final part of the book, “Part III: Risks and Opportunities in Frontier Markets,” provides a taxonomy of obstacles that investors may face. These obstacles can be categorized as political risk, macroeconomic risk, or microeconomic risk. Political risk may subject returns on—or returns of—capital to governmental whim. Detailed and entertaining examinations of the 1998 Russian debt crisis and Venezuelan leader Hugo Chavez’s doublespeak are cautionary tales of the value-destroying power of political risk. Systemic, currency, liquidity, and spillover risks are facts of life for practitioners in emerging markets. Moreover, operational risks related to custody and settlement can hinder the realization of investor profits. A chapter on frontier markets’ megatrends serves as a useful guide to future investment opportunities across numerous sectors. The book’s final chapter, “Frontiers of Frontier Markets Investing,” offers the author’s own perspective on future opportunities that remain inaccessible at present because of a lack of investable equity markets. Some frontier markets have quite remote corners.

Frontier Investor’s overriding theme is that no elixir for making money in frontier markets exists. The book’s narrative style and level of granularity are appropriately basic for a book intended primarily for lay readers. Even so, the case studies and general discussion are sufficiently erudite to serve as a succinct primer or refresher on the subject. The author acknowledges the value of the CFA®charter in the development of nascent equity markets by extending the investment skill set to professionals in these regions. He cites the increasing number of charters awarded in Nigeria, Bangladesh, and Vietnam. Indeed, CFA charterholders around the world would benefit from a thorough perusal of Frontier Investor.


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