Pros and Cons of Investing in Frontier Markets

Investing in Frontier Markets

While the performance of frontier markets continues to impress, many individual investors are still hesitant to take the plunge. The risks associated with such investments are indeed real and should not be underestimated. Nevertheless, there is little doubt that the frontier markets offer some of the world’s best earnings prospects. Although each investor is unique, it is schematically possible to classify investors into three different types of profile: prudent investors, investors with average sensitivity to risk, and investors looking primarily for the best returns. For the latter, since risk and performance are strongly correlated, taking risks is simply a necessity.

Taking advantage of the huge potential of frontier markets while keeping in mind that economic growth is not a strong driver of stock returns.

In terms of pure performance, stocks are undeniably the best type of investment over the long run; and many financial experts agree that frontier-market equities offer the best prospects. These markets, which are at an earlier stage of development than emerging markets, are characterized by strong economic growth and tend to pay high dividends. Unfortunately, investing in such markets also means to be exposed to significant risks such as currency risk or political risk. In addition, these markets have low analyst coverage and it is consequently much more difficult to access reliable financial information. It is also worth keeping in mind that when it comes to investing, many factors come into play. For instance, investors must not fall into the trap of thinking that a strong country’s economic growth is enough by itself to guarantee strong stock performance.

 Nigeria and Vietnam, frontier market stars 

Emerging countries are well known to the general public and include countries such as Brazil, Chile, Mexico, China and India while Frontier markets include less advanced countries such as Vietnam, Argentina, Nigeria and Bangladesh. A recent study conducted by PricewaterhouseCoopers has shed light on the radical economic changes the world is expected to see by 2050. Six of the world’s seven largest economies are expected to be emerging economies in 2050, led by China and India. Countries today classified as frontier markets would make a spectacular leap, especially Nigeria and Vietnam. Vietnam is the country that would make the biggest leap, moving up from 32^nd position to 20^th in just 34 years. A real economic miracle that the Southeast Asian country owes to its profound economic reforms. Several options are available to investors wishing to invest in Vietnam. Investors can opt for Exchange-Traded Fund (ETF), for specialized funds or finally decide to invest directly with or without the support of financial advisers.

The VanEck Vectors Vietnam ETF is undoubtedly the best-known option for investing in Vietnam. The fund covers approximately 70% of companies listed or domiciled in Vietnam or generating the majority of their income in Vietnam. However, the performance of this fund has been particularly disappointing in recent years and many investors are now looking for other ways to invest in Vietnam. The VinaCapital Vietnam Opportunity fund is not yet well known to the general public, but the company’s board of directors is working hard to change that. The recent fund’s s performances have been amazing and the company benefits from having an experienced and skilled management team. Finally, Anh Thomas Investment is a private financial advisory firm based in the United States that targets individual investors. The company’s staff is made of individuals with strong professional and educational backgrounds and their historical stock performance is similar to the one of VinaCapital Fund. Investors seeking to invest directly in Vietnam must open a brokerage account. There are more than 100 brokers in the country. The cumulative share of the 10 largest of them represents roughly two thirds of the overall market.

There are many reasons to be optimistic about the future of Vietnam and other frontier markets. The world keeps changing at a rapid pace and although no one can predict the future with certainty, history has often shown that the best investors are always those who have had the courage to take risks.