Frontier Markets - the Developing Economies of the Future
Investing in frontier markets allows investors to exploit the advantages of early market entry over the long term and thus participate in economic growth
In the latest issue of “Global Investor” from Credit Suisse, analysts and external specialists take an in-depth look at so-called frontier markets - developing economies that have only recently caught investors’ attention. Credit Suisse Research has developed an index to identify global frontier markets. By investing in frontier markets at an early stage, investors can exploit the advantages of early market entry in countries such as Vietnam, Peru or Kazakhstan over the long term and thus participate in their economic growth.
Traditional emerging markets such as the BRIC countries (Brazil, Russia, India, and China) can look back on exceptionally good economic performance since 2000. In the 1980s and 1990s, these markets were still experiencing high national deficits and had developed little in economic terms. In recent years, however, they have benefited enormously from the growth surge that has accompanied globalization. Financial services providers and international investors were quick to identify this positive development, which is why the range of financial products and the inflow of resources into these countries have grown significantly, particularly since 2003. While the BRIC countries had a share of just 4% of global market capitalization at the end of 2003, this figure has now risen to over 14%, which is more or less equivalent to their share of global gross domestic product (GDP). At the same time, their valuations have risen and the MSCI Emerging Markets index has gained in value compared to the MSCI World index in 2007.
Frontier Markets on the Brink of Future Growth
Nowadays, however, the traditional emerging markets are no longer influenced by the same economic momentum as in previous years. Some countries that are still generally referred to as emerging markets, such as Korea, now have a very similar economic profile to the developed countries. Investors should now be focusing on the “new” emerging markets - the frontier markets. By looking beyond the traditional emerging markets and extending their geographic focus, investors can invest in countries that are still undergoing development. Investing in these countries at an early stage is advantageous as many of these markets had been overlooked until now or were inaccessible in some cases. In order to be successful, investors have to identify those markets that demonstrate the same characteristics as the traditional emerging markets did before they improved their economic status.
The Credit Suisse Frontier Markets Index
Therefore, Credit Suisse Research has developed an index which identifies frontier markets according to the following criteria: (i) macroeconomic potential; (ii) population wellbeing; (iii) financial market development; and (iv) political stability. Each country is then rated based on its attractiveness. Countries with a comparatively low level of economic performance coupled with high potential for development include Vietnam, Peru, and Kazakhstan. These economies are characterized by low per-capita incomes, strong economic growth, an appropriate legal framework with regard to the rule of law, and geopolitical stability. At the same time, the financial markets in these countries are still at an early stage of development. Given that the geopolitical situation develops favorably, Credit Suisse expects these frontier markets to develop into extremely dynamic economies over the next few years and decades, that are likely to attract more and more attention from global investors.
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