Book Review: Frontier Investor | CFA Institute Enterprising Investor

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Frontier Investor: How to Prosper in the Next Emerging Markets. 2016. Marko Dimitrijević, CFA.


Arriving in Brazzaville, capital of what was then often known as the People’s Republic of the Congo, within the early 1980s, a junior banker was struck by the excessive stage of disorganization within the authorities ministry constructing and the encircling neighborhood. Equally placing was the willingness of bankers to increase credit score on unduly favorable phrases to what a dicey enterprise. Such was Marko Dimitrijević’s introduction to frontier markets, the place earnings could possibly be had by traders keen to eschew typical knowledge.

A core tenet of Frontier Investor: How to Prosper within the Next Emerging Markets is that the examine of frontier markets is essentially the examine of their macroeconomic surroundings. However, such examine additionally requires a microeconomic evaluation of firm fundamentals. Indeed, the 2 approaches are complementary.

The group of Frontier Investor lends itself to ease of reference and makes for an informative and interesting learn. The writer intersperses the narrative with case research wealthy in anecdotes that reinforce essential ideas.

“Part I: Why Invest in Frontier Markets?” presents cogent arguments in favor of investing exterior developed markets. A key benefit is that favorable demographics and low correlations with developed markets can supply worth and diversification advantages.

Dimitrijević first addresses rising markets, searching for to dispel frequent myths about them that traders harbor. For instance, rising markets have grow to be bigger, extra interconnected, and extra liquid than recommended by benchmarks that always underrepresent them. Moreover, rising markets’ volatility isn’t at all times as extreme as one would possibly consider. The developed world’s reproach of rising market international locations for his or her fiscal and financial insurance policies within the late 1990s (suppose forex interventions and Asian markets’ prohibition of quick promoting in 1997–1998) rings hole within the wake of the worldwide monetary disaster of 2007–2008, which noticed the United States and different developed economies resort to the exact same insurance policies.

This part of the e book is a examine in each macroeconomic historical past and funding administration. Indeed, the dialogue of rising markets’ quite a few benefits gives necessary historic context. As rising markets “emerge,” new ones change them.

Enter frontier markets. The classes of monetary historical past are invaluable to traders exploring this asset class. Dimitrijević notes how Turkey’s evolution from frontier to rising market standing rests on the pillars of elevated financial freedom and urbanization, improved infrastructure, higher wealth and a rising center class, sturdy company governance, and sturdy inventory market efficiency. The confluence of those attributes fosters the expansion and evolution of frontier markets into rising markets—although not at all times, because the examples of Sri Lanka, Pakistan, and Venezuela attest. In some instances, the shortcoming of frontier economies to realize recognition as rising economies outcomes from their failure to satisfy index suppliers’ minimal thresholds for measurement and liquidity. Persistent classification as “frontier” influences investor perceptions, typically unfairly.

Improved fiscal administration, lowered exterior debt, better-managed inflation, elevated overseas direct funding, fast progress, advantageous demographics (30%–40% of the world’s 15- to 34-year-olds reside in frontier markets), and world integration via enhanced applied sciences harnessed to training — all are at work in frontier markets.

Attractive worth and portfolio diversification alternatives exist in frontier markets. Despite rising investor curiosity, they continue to be comparatively inefficient owing to decrease ratios of market capitalization to GDP than in developed markets and sparse sell-side protection. This relative neglect creates an funding benefit.

“Part II: How to Invest in Frontier Markets” explores the varied methods traders can obtain publicity. These methods are affected by the markets’ various levels of opacity and effectivity. Passive funding is problematic as a result of the benchmarks are sometimes not reflective of the true universe. One instance is MSCI’s 2014 determination to drop each Qatar and the United Arab Emirates from its Frontier Markets Index, of which they accounted for 30% of market worth. In addition, the passive method fails to seize inefficiencies that facilitate worthwhile funding within the house. Active administration is a extra worthwhile endeavor. It can embrace direct funding in native nation equities, company bonds, GDRs (world depositary receipts), or ADRs (American depositary receipts); proxies, similar to multinationals, commodities, or industries with vital frontier market publicity; or forex performs.

The remaining a part of the e book, “Part III: Risks and Opportunities in Frontier Markets,” gives a taxonomy of obstacles that traders might face. These obstacles may be categorized as political threat, macroeconomic threat, or microeconomic threat. Political threat might topic returns on — or returns of — capital to governmental whim. Detailed and entertaining examinations of the 1998 Russian debt disaster and Venezuelan chief Hugo Chavez’s doublespeak are cautionary tales of the value-destroying energy of political threat. Systemic, forex, liquidity, and spillover dangers are information of life for practitioners in rising markets. Moreover, operational dangers associated to custody and settlement can hinder the belief of investor earnings. A chapter on frontier markets’ megatrends serves as a helpful information to future funding alternatives throughout quite a few sectors. The e book’s remaining chapter, “Frontiers of Frontier Markets Investing,” affords the writer’s personal perspective on future alternatives that stay inaccessible at present due to a scarcity of investable fairness markets. Some frontier markets have fairly distant corners.

Frontier Investor’s overriding theme is that no elixir for earning money in frontier markets exists. The e book’s narrative model and stage of granularity are appropriately fundamental for a e book meant primarily for lay readers. Even so, the case research and basic dialogue are sufficiently erudite to function a succinct primer or refresher on the topic. The writer acknowledges the worth of the CFA constitution within the growth of nascent fairness markets by extending the funding talent set to professionals in these areas. He cites the growing variety of charters awarded in Nigeria, Bangladesh, and Vietnam. Indeed, CFA charterholders world wide would profit from a radical perusal of Frontier Investor.

More book reviews can be found on the CFA Institute website or within the CFA Institute Financial Analysts Journal®.

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All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially mirror the views of CFA Institute or the writer’s employer.

Marc L. Ross, CFA

Marc Ross, CFA, is an skilled funding skilled with a diverse talent set that encompasses third get together supervisor analysis and due diligence, securities compliance, funding advisory, and ERISA certified plan design, gross sales, and implementation. In addition to the CFA constitution, Ross holds the CFP® and CLU designations.

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