Frontier markets’ recent growth levels should make the sector highly attractive to return-seeking investors. However, as Gill Wadsworth finds, accessing this sector is not for the faint-hearted.
The death of 48 people following a fire in a Bucharest nightclub marked the end for Romanian prime minister, Victor Ponta, who many of the country’s citizens deemed responsible for the tragedy.
Romania’s anti-corruption police are investigating whether the owner of the Colectiv nightclub should have been granted a license given its lack of suitable fire exits and smoke detectors.
This latest scandal was just one of many in a long line of corruption charges brought against the Romanian government and was finally enough to bring down the country’s most senior politicians.
The political instability in Romania should be a setback for investors who see the country as one of the most promising frontier markets, yet fund managers refuse to have their spirits dampened.
Greg Konieczny, fund manager at Romanian specialist investment house Fondul Proprietatea, says Ponta’s resignation signifies the end of much needed political reform, leaving the country free to enjoy economic prosperity.
Konieczny says: “People are fed up with the corruption taking place. What is happening now is the final transformation of Romania into a country driven by more transparency and where politicians are more interested in the economy and the welfare of citizens rather than in taking power and making wealth for themselves.”
Konieczny predicts GDP growth of 5% for Romania next year; a figure that is supported by International Monetary Fund (IMF) predictions for the future economic prosperity of the world’s frontier markets.
July’s World Economic Outlook report from the IMF forecasts growth for advanced economies at 2.4% next year, compared with the 4.7% expected from the developing world. Returns from frontier markets have outstripped their near counterparts in the emerging markets over three and fiveyears.
And it is this level of growth that should make frontier markets one of the most attractive asset classes for return-seeking investors.
Oliver Bell, portfolio manager of T Rowe Price’s frontier markets equity strategy, says: “The frontier markets are a collection of countries all at an early stage of development for the growth and that growth is superior to anywhere in the world.”
FALLING SHORT
However for all this fund manager excitement, there is no escaping frontier markets lag the All Countries World index significantly over one, three, five and 10 years. The story for frontier markets in the most near term is also desperate. For the year to 9 November 2015, the MSCI Frontier Market index returned -17.37% compared with -2.39% for the MSCI All Country World index over the same period.
Advocates of frontier market investment are further undermined by warnings from the IMF that changes to economic policy in the US could have dire consequences for the developing regions.
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