“Frontier markets are the place to be if you’re a truly adventurous investor,” says David Stevenson in the FT. “They offer a unique combination of high-growth potential, market inefficiency that can lead to above-average returns and a relatively low correlation to developed world equity markets.”
So while many markets around the world struggle, investors are seeking out the returns available in regions such as Africa. Stocks such as Safaricom, Celtel Zambia and Dangote Flour “are helping to turn the continent into the world’s hottest source for initial public offerings”, say Janice Kew and Michael Tsang on Bloomberg.com. Kenya’s Safaricom jumped by 40% on its first day of trading this week. At least 22 sub-Saharan firms are planning to float this year and inflows are soaring, despite the risks: “50 of 52 African countries had ‘rampant’ or ‘serious challenges’ with corruption, according to Transparency International.”
For some, Africa doesn’t qualify as particularly adventurous; fund manager Bjorn Englund is beating the crowd into what he calls a “pre-frontier” market. Englund’s tiny ($20m) Babylon fund is “the only Western open-ended fund invested in the Iraqi stock exchange”, says Kate Walsh in The Sunday Times. Although Babylon is mostly invested in banks that are majority-owned by larger foreign groups, risks are obviously high., Nonetheless, Babylon’s investors – 95% institutions – include Scandinavia’s top pension fund, attracted by the 20% a year average return Englund has managed so far and his goal of averaging 30% over the next five.
Despite his general enthusiasm for frontier markets, the sudden rush of interest worries Stevenson – especially the way that exchange-traded funds are proliferating and fund groups are “noisily launching” products aimed at retail investors. “I suspect that a nasty crash is on its way as more money chases ‘investment opportunities’ in frontier countries not quite ready for the big time.”