Investors looking to repeat the success of traditional emerging markets are turning to "frontier" markets for higher risks and rewards, Christian Deseglise, global head of emerging markets at HSBC, said on December 07.
"The idea is to move towards the next wave of emerging economies, the economies that maybe 10 years from now will be the new Malaysia or the new Korea or the new Brazil, and to catch them at an early stage of development," Christian Deseglise told Reuters in an interview in Hong Kong.
Potential target markets would include Kazakhstan, Vietnam, Ukraine, Bulgaria, Romania, Ghana, Nigeria, Colombia and Peru, as well as countries with a high standard of living but embryonic capital markets, such as Qatar, the UAE and Kuwait. Many of yesterday's wildcard markets have "emerged" into virtually developed economies, but investors still have an appetite for the more exotic end of the spectrum.
"What we've seen in emerging markets in the last 10 years is now moving to the frontier markets. So unless you think that China and India are going to stop growing and won't need commodities any more and that globalisation is over and there's going to be a rise of protectionism everywhere, these markets should continue to do well.
"There's big catch-up potential because they start from a low base." But the list is limited to those countries where the markets are developed enough for investment, a criterion that keeps large parts of Africa out of play. Countries such as Mali or Burundi were just not "investible", he said.
A frontier fund would need active management to respond to changing conditions, making it hard to pick a set of sectors that would be good for all seasons, Deseglise said.
But he added he favoured infrastructure-related stocks such as cement companies, consumer-related plays such as retail firms, and banks. A tentative portfolio might include 20 percent in Africa and 20 percent in Gulf Cooperation Council countries, he said. Although the frontier markets tend to be prey to a variety of domestic risks, they have a low correlation to world market fluctuations, making them of interest to investors who want to avoid putting all their eggs in one basket.
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