Frontier Markets– Moving Beyond Emerging, BRICs, Developed Countries: Unpredictable, Volatile, Risky, Irresistible

Frontier markets are underdeveloped emerging markets in nations with economies lagging behind the industrialized world, but showing potential for future development… Countries around the world are broadly classified into various categories based on their economic development. These categorizations are based on a number of criteria ranging from per capita income to life expectancy and literacy rates…

According to Justin Kuepper; there are many different measures of development used by a wide variety of institutions. For instance, the United Nations has few conventions for distinguishing between developed and developing countries, while the World Bank makes specific distinctions using gross national income (GNI) per capita, though other analytical tools may also be used.

In general, the International Monetary Fund’s (IMF) definition may be the most complete, taking into account per capita income, export diversification, and the degree of integration into the global financial system. In 2011, the IMF published a research report on the topic of classification called Classification of Countries Based on Their Level of Development... As a hard example, the World Bank considers countries with per capita income of less than US$12,275 as developing countries…

Different organizations use different measures to determine how countries are classified, but there are a few common denominators in the mix. For example, the so-called BRICs are generally considered developing countries and include; Brazil, Russia, India, China, and South Africa, but other commonly considered developing countries go far beyond the BRICs: Some of these countries are: Argentina, Chile, Malaysia, Mexico, Pakistan, Philippines, South Africa, Thailand, Turkey, Ukraine. Frontier markets are considered a type of emerging market but are considered less prominent or important than BRICs markets…

The concept of frontier markets was developed by the International Finance Corporation (IFC) in the 1990s to describe a specific subset within the larger group of emerging markets. Emerging markets in general are economies in the process of developing rapidly and showing explosive potential for growth…

Within the emerging markets around the world, small markets with poor liquidity and low market capitalization are considered frontier markets… The implication of a country being labeled as frontier is that, over time, the market will become more liquid and exhibit similar risk-return characteristics as the larger, more liquid developed emerging markets…

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Emerging and Growth-Leading Economies (EAGLE) is a grouping of key emerging markets that include: Brazil, China, Egypt, India, Indonesia, South Korea, Mexico, Russia, Taiwan, Turkey. The EAGLE economies are expected to lead global growth in the next 10 years, and to provide important opportunities for business. EAGLE is a grouping acronym created in 2010 by BBVA Research to identify all emerging economies, whose expected contribution to world economic growth in the next ten years is expected to be larger than the average of the G6 economies (i.e., France, West Germany, Italy, Japan, UK, Canada).

This is a dynamic concept where country members can change, over time, according to their forecasted performance relative to developed economies. Over the years there have been several attempts to try to implement the economic concept that will best reflect the potential of emerging markets in the coming years. After BRIC concept was coined by Goldman Sachs in 2001, there were other endeavors to find the best grouping acronym such as: CIVETS, Next Eleven, 7% Club, EAGLE…

In addition, as part of the EAGLE proposal, they identified the EAGLE’s Nest as a second set of countries with expected incremental GDP in the next decade to be lower than the average of the G6 economies but higher than the G6 minimum… The membership of the EAGLE’s Nest is subject to a yearly revision and can change according to forecasted economic performances, currently the EAGLE’s Nest countries includes: Argentina, Bangladesh, Chile, Colombia, Egypt, Malaysia, Nigeria, Pakistan, Peru, Philippines, Poland, South Africa, Thailand, Ukraine, Vietnam…frontier spring09_frontiermarkets_figure1

In the article Frontier Emerging Markets by Ed Marsh writes: Basing future business expectations on past success is indeed a very risky proposition, particularly as market conditions change quickly and the economic center of mass shifts from developed markets to emerging markets… Perhaps a dose of emerging markets, carefully selected and strategically engaged with risks mitigated really should be part of your business plan… And, before you say– sure, but we must stay focused– here’s a point to ponder: On what are you focused? Strategic growth or simply myopic execution of the domestic strategy that you have convinced yourself that it’s been masterfully crafted…The point is; do it right–don’t just do it…

In 2011 a growing number of business people tried to distinguish between the old emerging markets and new emerging markets, and asked themselves; which are the real emerging markets? Where they the old ones, the group that Goldman Sachs dubbed the BRICs, but they are  now suffering from the law of diminishing returns… So then why not look elsewhere, such as; new emerging markets? These come in two varieties: overlooked countries that can rival the BRICs in terms of prosperity, as well as, the frontier countries that are only just beginning to emerge from their chrysalis.

Frontier markets are by their very nature unpredictable… but they present numerous things that are irresistible to the West’s growth-starved companies, for example; they offer huge opportunities for investment in infrastructure… Africa contains a disproportionate share of the world’s mineral wealth at a time when mineral prices are soaring…

True, the growth is volatile, but an increasing number of companies, looking at the West’s flat markets, will decide if that volatility is at least a sign of life. Above all, the overlooked and frontier markets offer businesses a chance to get in on the ground floor.

Companies that move first will enjoy lots of advantages: They will be able to forge deals with aggressive young companies, strike infrastructure deals with local governments, and  shape the tastes of future consumers… Companies that succeed in these neglected emerging markets are not only putting down roots in the world’s most fertile soil. They are giving themselves a chance to establish business habits for years to come…

In the article The Frontier Beyond BRIC by Richard Rittorno writes: The Report Global Growth Generators: Moving Beyond Emerging Markets and BRIC by Willem Buiter and Ebrahim Rahbari begins with the statement: We expect strong growth in the world economy until 2050. Now when I read this statement– I couldn’t stop scratching my head. It’s so difficult for economists to guess what is going to happen next year in U.S., let alone in 2050 in undeveloped markets…

The report predicts frontier markets growth to average 4.6% annually for the next 17 years, then drop to 3.8% for following 20 years afterwards in an explosion of the developing economy. The report goes on to say eleven economies are currently set to see the strongest of the growth rates. Five of the countries named are classified as emerging markets by the research firm MSCI: China, Egypt, India, Indonesia, and Philippines.

The other six countries are found on the MSCI list for frontier markets: Bangladesh, Iraq, Mongolia, Nigeria, Sri Lanka, and Vietnam. All six of these countries are politically unstable with mismanaged economic policies causing widespread poverty; not to mention that most are considered hotspots with little to no education systems established. However, the authors of the report see something in these countries in the long-term.

My initial reaction is if one or two of these countries truly take their places on the world stage, it would put more pressure on natural resources already running in high global demand with limited quantities, such as; crude oil, fresh water… Granted, frontier countries may only have room to move upwards, but caution is strongly advised. History has taught us that emerging markets may have a lot of room to improve, but they do not always match expectations or the same in return on investment (ROI)…

The term frontier markets may be ubiquitous, but its criteria are not very well-defined. As a result, there are many different lists of frontier markets that are put together by various organizations. The most common lists used by investors are those assembled by the FTSE, MSCI, and S&P, which vary in number from 25 countries to more than 30 countries.

The common countries between these lists in 2010 included: Argentina, Bahrain, Bangladesh, Bulgaria, Croatia, Estonia, Jordan, Kenya, Lithuania, Mauritius, Nigeria, Oman, Qatar, Romania, Slovenia, Sri Lanka, Tunisia, and Vietnam. However, it’s important to note that the list of these countries is subject to regular change as economic and political climates change.

Frontier markets are rarely stable, and the very notions of frontier– appeals to  much of the inherent human desires to– push ahead, explore and discover new things. In human history, important discoveries  are mostly about physical boundaries– conquered by explorers, or knowledge boundaries– overcome by scientists; so it’s the same with expansion in business markets…

Frontier markets are constantly in a state of flux; such that, as little-known opportunities in countries, technologies, industries are uncovered they evolve into established business markets and assets with measurable properties. In these cases; the risk, return and correlated properties are central to the management of business investment…

Frontier markets are dynamic: As countries grow and mature they evolve along different paths, and they either, move-up (or -down) the risk-return market development categories; while other newer countries emerge to take their place at the frontier market level…

The phenomenon of globalization has resulted in a broad-deep pool of business opportunities, and the increased importance of these countries as measured by a number of macro-economic indicators necessitates their consideration as important additions for serious business considerations and market investments…