My last research trip to Asia included eight flights and nearly 50 grueling hours in the air. During this time, I had the opportunity to ponder a question I am frequently asked, “How do you define a frontier market?”
Just as we are all inclined to label and categorize things for simplification, investors do the same with asset classes in attempts to simplify analysis. But these labels can sometimes mask important realities behind a caricature. For many investors, the “frontier” and “emerging” labels, first and foremost, provoke feelings of risk, unfamiliarity and perhaps a bit of exotic remoteness. But when do these reservations obscure rather than simplify the investment decision? Are the labels then of any real use?
Since I’ve spent the majority of my life living in both emerging and frontier markets, I would say that using the broadly accepted measure of “per capita income” to distinguish between frontier and emerging markets is probably too simplistic and not consistently applied. Let’s consider the “frontier market” of Sri Lanka as an example. According to the World Bank, the nominal GDP per capita in 2012 was US$2,923. This measure ranks Sri Lanka above the Philippines and India, both of which are firmly in the more developed “emerging market” camp. The classification reality is far more nuanced and a “one size fits all” measure is surely not appropriate.
When I think about definitions for emerging and frontier markets, I bear in mind many qualitative issues before assigning a label. I remember many years ago in Africa, at a major border post on a north-south artery road, officials had run out of the necessary forms. So, accordingly, they would not let us cross because we could not submit the required documentation. That, to me, qualifies for the frontier tag. And when a local consulate takes six weeks to issue a simple travel visa, that country is probably eligible for the frontier label too. By contrast, Sri Lanka, which was famously mired in civil war for more than two decades, now has a quick and efficient online visa system. In Myanmar, officials welcome you in a crisp, unemotional and efficient businesslike manner.
Another possible measure of a frontier market is food availability. I was astounded to learn on a recent trip in an emerging Asian economy, which I would prefer not to name (lest I offend), that several expatriates I met ordered vegetables from abroad on a regular basis because they found too many concerns with the quality and safety of the local produce. This was surprising to me since I had lived in Vietnam for four years where we enjoyed delicious local produce with absolute confidence. Could quality of food and produce be a factor in comparing emerging versus frontier markets?
As my trip drew to a close, I concluded that a frontier is a place where local, political, and social forces inhibit positive changes. This can be seen in past decades in so many frontier countries, it is often a case of two steps forward and two steps back. By contrast, in Asia one can see solid evidence that these smaller economies are moving forward, although certainly not without some setbacks along the way. It is this positive momentum that we as investors like to see in order to gain a sense that there are probable, rather than just possible, opportunities for improvement over the medium and longer term. Here at Matthews Asia, we focus on the fundamental prospects of individual companies. As such, the various definitions or classifications of different markets are basically irrelevant as we hunt these fertile economies in search of worthy investment candidates.
Our research travels can be exhausting but constantly interesting and fruitful. They are critical to our understanding of the investment opportunities that may exist. In this process, we tend to ignore the various market labels and work to decipher the underlying realities so that we can uncover what is beneath the exotic mask of Asia's frontier and emerging markets.