Frontier markets offer investors a real growth opportunity according to consultants Cambridge Associates.
Speaking at the NAPF Investment Conference in Edinburgh, Alex Koriath, head of UK pensions practice at Cambridge Associates, said that the market capitalisation of frontier markets, as 1% of global market cap, was around one-tenth of their share of global GDP. He added that frontier markets now contain a huge middle class with a growing disposable income. “There are 400 million people in this bracket in Africa, and comparable numbers in India and China. They are supporting domestic consumption and are an important element in expected growth.”
Koriath added that reforms are making frontier markets easier to access by investors, and more stable governments were also helping. But frontier markets are not risk-free and investors should expect a 4-5% risk premium for political, currency and country risk. In return, frontier markets provide diversification benefits, particularly sub-Saharan Africa countries, which have a lower correlation to developed markets.
From an investor perspective, Jonathan Hunt, an investment manager at the City of Westminster Pension Fund, said that it was important to get trustees comfortable with frontier markets, and that this takes time. “Our trustees are elected officials and they have to think about “the Evening Standard test”, or if an investment decision goes wrong, how will it look on the front-page of the Evening Standard?” He added that a lack of liquidity was another concern, as it would make it hard to divest in a crisis. “Investors have to go into these markets with their eyes open,” Hunt concluded.