Frontier Fans’ Ten Top Hits
A new Bloomberg book Frontier combines global travelogue with specific dedicated debt and equity fund manager views to spotlight their ten leading picks across all regions. Myanmar, without functioning public markets is at the bottom, and Nigeria wins the top ranking, with the caveat that Iran, bypassed due to existing sanctions that could be lifted with a proposed anti-nuclear deal, could soon be “the most compelling” bet. The author Serkin is Bloomberg’s emerging markets editor at large and noted Templeton investor Mobius pens the introduction and conveys bottom-up and top-down wisdom from 40 years of stock picking and company visits aided by private jet. The other managers are from both big-name and specialist houses, and their quantitative and qualitative analyses are as diverse as the frontier MSCI and NEXGEM index rosters. The mix of objective and subjective factors highlights the difficulties of portfolio selection and conflicts and guidelines are ultimately left to the reader and professional advisers to sort, with the implication that passive ETF choice may not be the best route for this asset class. In this respect, the work joins recent warnings by the US self-regulatory body FINRA that retail investors may not fully appreciate risks and should opt for experienced traditional mutual funds.
In the opening the Pakistan Stock exchange is identified as the outperformer the past decade with a 175 percent gain, although it originally was part of the MSCI main tier until demotion from capital controls. Since 2000 Mongolia has led up over 3000 percent even though it has yet to formally join the frontier index, and Colombia also climbed over 1000 percent but is in the core universe. The volume covers just one-quarter the 40-50 counties classified in the broad “exotic” category, including distressed secondary debt available for outcasts like Cuba and North Korea. According to general characteristics, stock markets have lower capitalization, correlation and liquidity relative to standard emerging markets, and per capita incomes and securities development also typically lag. Africa’s contingent in particular has fast growing economies and consumer goods have boomed alongside historic commodities reliance, although financials remain 40 percent of MSCI’s 25-member frontier listing. The group tends toward younger demographics, greater political instability and poor infrastructure, but may have minimal foreign debt after bilateral and multilateral cancellation programs. They are under-researched and lack domestic institutional investors, and may have scant corporate alongside government debt and venture capital with public equity.
Nigeria’s size despite its litany of oil, security and currency woes may explain the number one finish ahead of 9th place Ghana on the continent, which the writer describes as “too laid back” not to mention the backsliding to IMF assistance with double-digit budget and current account deficits. In the Asia pack Vietnam beats Sri Lanka and Myanmar on the 40th anniversary of US troop withdrawal and 20th of stock exchange launch with its ASEAN and China integration. In the Middle East Saudi Arabia, which is to enable direct overseas access next month, outpaces Egypt with the author’s experience in the respective locations colored by accidental beheading witness and brief army detention. Romania is Europe’s only entry and was shunned for social problems offsetting fiscal balance and privatization, while Argentina, formerly in the core MSCI universe was chosen third in manager preference with hydrocarbon reserves and the twilight of the twin Kirchner populist presidencies. A broader survey as Bloomberg routinely conducts quarterly of global allocators may reveal different placement and top ten choices as the continuing journey jostles presumed pioneers.
