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Frontier markets: Short term success and long term potential
The frontier markets have outperformed emerging markets since early 2013, and this year they even beat the world index. Emerging markets are far from losing their appeal, but the next wave of quickest transition and incremental growth is likely to come from the so-called frontier markets, says Peter Elam Håkansson is the chairman of East Capital
Peter Elam Håkansson 24 Nov 2014
 
   
The frontier markets have outperformed emerging markets since early 2013, and this year they even beat the world index. Emerging markets are far from losing their appeal, but the next wave of quickest transition and incremental growth is likely to come from the so-called frontier markets.

We believe that factors such as growth in working age population, rising education level and political stability underpinned the strong expected growth for those markets. Emerging and frontier markets present a very attractive investment proposition despite periods of negative market sentiment.

Despite the name being coined in 1992, there is no general definition of frontier markets. It is a term commonly applied to small markets that are relatively highly developed, but not enough to be considered to be emerging markets. We believe frontier markets are the next generation of emerging markets. Common characteristics for frontier markets include currency risk, small and illiquid markets, non-transparent and poor regulatory framework with high transaction fees.

Frontier markets are generally divided into three blocks: Eastern Europe, the Middle East and Africa (EMEA); Asia and Latin America. EMEA constitutes the by far largest share of the investment universe (about 79 %), followed by Asia (14 %) and Latin America (7 %).
 
East Capital has done most investments in EMEA and Asia, making up 93 % of the frontier markets. The Latin American share of the investment universe is basically one country – Argentina.
 
While capital flows to frontier markets are gathering pace as investors diversify and seek growth, frontier markets are still underrepresented as an asset class - taking into account their GDP and their population’s contribution to the global economy. We also see that frontier markets are traded at a discount compared to emerging markets. Add that several old regimes have been changed to more market friendly ones and there is big potential in those markets.

The prospects for frontier markets also look promising in the long run. A key investment factor of frontier markets is their positive demographics. Besides, the median aged citizens within most of those countries are in their twenties, or are even teenagers.
 

Peter Elam Håkansson is the chairman of East Capital 

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