Understanding frontier markets from all angles | AAG Wealth Management

Understanding frontier markets from all angles

Posted: September 21, 2020


What are the challenges and opportunities in the emerging markets of tomorrow?

We spoke with Gavin Serkin, author of Frontier: Exploring the Top Ten Emerging Markets of Tomorrow, in a recent episode of Tomorrow Comes Today, the thought-leadership podcast from St. James’s Place Wealth Management.

Someone once said that journalism is taking something people don’t care about or know about, and suddenly making them care a great deal. This feels a bit like your work exploring frontier markets: unearthing a country and exploring where the value is and how we can turn that into an opportunity.

What attracted me to frontier markets in the first place is that I’m less inspired by the part of the story that everyone’s focused on. As a journalist, I’m looking where people aren’t necessarily looking. I was working at Bloomberg running the emerging markets desk and had the feeling that we weren’t getting the stories that I knew were happening on the ground. So the book was really a chance to look a bit deeper into frontier markets, to live in those countries for a while, and to experience the micro story that was harder to project through big media.

There’s also a sense that the media often tells a very one-sided story of countries. You’re hearing about conflict, you’re hearing about poverty, and while these things do exist, the headlines don’t portray everything that’s going on.

It can be very difficult for people to get beyond this – they have one idea in their heads.

Yes, absolutely. I have the most trouble expressing the potential of Nigeria. Nigeria has been so infamous for corruption and conflict – but it also has this massive land reclamation project called Eko Atlantic, for example, where it’s taking a swathe of Lagos (pictured above) and extending it by a few miles. It’s the sort of thing that you’d see in Dubai.

My aim was really to look ten or more years into the future, at the countries where you don’t necessarily want to rush in right now, because you want to see the lay of the land. But looking at countries where things are going to happen. And Nigeria is a case in point: the light bulb goes off when I mention that Nigeria by 2050 will be the third largest nation on the planet.

As an investor, you’ve got to look ahead, look further forward – what do you see and where do you go for those opportunities?

We have these movements for clean capitalism, for environmental, social and governance (ESG), and so on, where we’re looking at a company’s sustainable activities. Is that layer of trustworthy, transparent information lacking in most frontier countries?

In a word, yes. It is lacking, and that is a challenge. To a great extent, that is why they are frontier markets – you don’t often have the extent of rule of law, liquidity and transparency, and so that’s your challenge as an investor.

The ESG wave is very positive for frontier markets and emerging markets, because it is focusing people’s minds on the bigger picture. If I’m putting money into this company, into this sector, what effect is it going to have on people’s lives and on the economy? In frontier and emerging markets, you’re dealing with companies and countries that have less budget than in developed world, and therefore are not able to make changes to fit ESG rules.

So ESG becomes much more about deep engagement. It is about working with companies and countries so that you can get to a better place in three or five years.

Do you find that it’s hard to get investors to try something new – that it’s tough to open people’s eyes to change? Because this has got ramifications for investing patterns in all sorts of categories, hasn’t it?

I think, increasingly, the mindset of investors is turning. We had the financial crisis just over a decade ago; now we’re in the COVID-19 crisis, and what it tells you is that if you’re investing, even in super-rich countries, risk is everywhere.

Emerging markets used to have this risk premium, because you’re going into areas where you don’t understand quite so much, and you’re therefore demanding a higher multiple on the profit or price-to-earnings – or a higher yield for bond investors. That still exists, but now investors are seeing that you’re taking risk wherever you invest – even the so-called safe bet.

Investors are thinking, “Well, I need to make money; where do I go? I’m worried about the economies that I know and understand here in Europe or in America, how about emerging markets?”

Gavin Serkin is founder and CEO of New Markets Media & Intelligence

The opinions expressed are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. The views are not necessarily shared by other investment managers or St. James’s Place Wealth Management.

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