Frontier Markets Focus


By Dan Keeler

In a new monthly feature, Global Finance delves deep into the opportunities in frontier markets. With youthful populations, underutilized natural resources and eagerness to join the global economic community, the world’s frontier markets are increasingly attracting mainstream corporate attention.

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As developed markets teeter on the brink of recession and emerging markets struggle to maintain the blistering growth rates that made them the darlings of investors and multinationals over the past two decades, the corporate world’s attention is starting to focus on a new target: frontier markets. These new markets hold immense appeal for corporations hungry for growth.

The new frontiers are sometimes—aptly—compared to the emerging markets of 20 years ago. The potential for growth is clear, as is their propensity for providing companies with enhanced financial returns. As a result, frontier markets are the subject of feverish interest among investors. A recent $750 million eurobond issued by Zambia, for example, was reportedly 20 times oversubscribed. Stock indexes in the frontier markets are turning in some eye-popping numbers, too. According to the MSCI, between January and mid-November 2012, Kenya’s stock market was up a staggering 55.7%. Others were almost as impressive—with Kazakhstan’s up 38.2%, Estonia’s up 29.2%, Ghana’s up 24.8% and Botswana’s up 17.7%.

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Graham, Voltan: Consumers in developing countries often have more disposable income than overall GDP per-capita figures suggest

The case for financial investment in frontier markets is arguably strong, but the case for multinational corporate attention may be even stronger. According to John Kornet, founder of the Frontier Markets Compendium, which identifies 64 countries as frontier markets, the demographics are among the most attractive characteristics of the new markets. “The median age in the developed world is 44,” he says. “In the frontier markets, it is 22.”  The sheer numbers of people are compelling, too. Kornet estimates that more than 30% of the world’s population is located in frontier markets countries. This youthful population translates into millions of workers as well as consumers, he asserts.

“Frontier markets also tend to have low debt-to-GDP levels, high economic growth rates when compared to developed and emerging markets countries, rapid growth potential and attractive valuations of local businesses,” Kornet adds.

It is these last two characteristics that most clearly highlight the immediate opportunities frontier markets present for established developed-markets companies. However, building a toehold in a new market, particularly one that is still in the very early stages of its economic development, can be extremely challenging, says Ryan Hoover, portfolio manager at US firm Africa Capital Group. “Most companies tend to enter a new market by buying a stake in a local company and developing a presence in the market through that company,” he notes.

Teaming up with a local firm has many advantages. For example, a domestic outfit should already be adept at navigating local regulations and markets. It can help overcome or even negate a language barrier, and it will give the foreign company local credibility and access. But although this approach can represent a neat shortcut, it carries its own risks, and finding the right local partner is perhaps one of the biggest challenges a company will face as it tries to enter a new market.

As frontier markets get more attention from investors and multinational corporations alike, organizations are emerging that can help identify the best local partner. Britain’s Tullow Oil, for example, has recently established an initiative called Invest In Africa to help MNCs find appropriate partnerships. And there is a growing army of advisers focused on the frontier markets who can help devise the best strategy for harnessing a new market’s potential.

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One of the key questions is whether the market is large enough to absorb a new entrant. Often the official economic data give the impression that a market may not be big enough or may not be growing fast enough to justify an investment. However, publicly available macroeconomic data may be misleading, says Alison Graham, chief investment officer at frontier-markets fund manager Voltan Capital Partners: “The headline numbers often don’t tell the whole story. Consumers in developing countries often have more disposable income than the overall GDP-per-capita figures would suggest,” she comments.

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Hoover, Africa Capital: Most companies tend to enter a new market by buying a stake in a local firm and developing a presence through that company

Hoover says Africa’s new markets are a case in point: “Companies are finding there’s a lot of money there even though, on an individual basis, people don’t appear to have a lot of spending money.” Noting that multinationals such as Unilever and Nestlé are becoming expert at targeting the so-called bottom of the pyramid, Hoover adds that consumers in developing markets “tend to be very brand-conscious and aspirational in their purchases. Retailers are finding very fertile ground in Africa right now,” he adds.

According to Graham, it is not just the brand but the quality of the product that is important: “People in newly developing markets are well aware of the quality of what they’re buying and, if they have the money, are quite prepared to pay a little more for higher-quality products,” she explains.

But how much extra they are prepared to pay may be a lot less than many companies would need to balance the cost of entering the market. Demand for higher-priced imported or foreign-branded goods may also be quite fragile. “When money’s tight, people in frontier markets will quickly shift back to buying the cheaper, lower-quality products,” Graham cautions.


With all the hype around frontier markets in the investing world, it’s tempting to treat such markets homogeneously and view them as sure winners over the long term. Baldwin Berges, managing partner of frontier-markets investment manager Silk Invest, argues strongly against that perception: “It doesn’t make any sense to treat all frontier markets as a single asset class. We encourage people to forget about indexes and really go where there is economic growth and opportunity,” he says. “People do need to categorize things in order to understand them, and indexes help them to do that, but if you’re serious about investing, you have to look beyond the indexes.”

And if there is one characteristic that all frontier markets countries share, it is that, if you want to invest there, you have to be serious.