Although frontier markets are a small subset of the emerging market universe, we think they represent an important constituency that offer some compelling potential opportunities. Here, I’ve invited my colleague Carlos Hardenberg, senior vice president and director of frontier markets strategies at Templeton Emerging Markets Group, to outline some of the opportunities he sees in these dynamic markets and debunk some of the urban myths.

Carlos Hardenberg

Carlos Hardenberg

Senior Vice President and Managing Director

Templeton Emerging Markets Group

There are a number of urban myths about frontier markets (the less-developed subset of the emerging-market universe). We think these myths may have caused investors to overlook them in favour of developed or traditional emerging-market alternatives.

We believe conditions are now ripe for a re-evaluation of this important niche. There are some very compelling reasons why many investors might want to take another look at frontier markets today. These can be summed up as the following, which I will delve into further.

  • Expectations for robust economic growth
  • Continued macro development
  • Deep discounts in valuations
  • Low correlations

Busting the Urban Myths

But first, let’s address those urban myths about frontier markets. The most persistent are perceived illiquidity, small market capitalisation and poorer corporate governance standards.

Each of those accusations might be true if one looks just at a narrow selection of markets, but looking at the global opportunity of the frontier space, as we do, provides a better context in our view. While index providers differ in what each regards as a frontier market, we don’t adhere to those definitions or constraints. This gives us more flexibility to explore opportunities beyond a particular benchmark, and avoid some of those limitations. We view frontier markets more broadly as young or new markets in an earlier stage of economic development than larger emerging markets, generally with higher growth rates, less research coverage and a lesser degree of foreign investment.

According to our analysis, the daily turnover traded on stock exchanges in frontier markets is US$2.1 billion every day. So it’s more liquid than many people think.

Equally, we estimate the total market cap of frontier companies is $1.7 trillion. Because new companies are constantly coming to market, we’d expect that figure to continue to increase.

Active Management as a Force for Good Governance

When it comes to concerns about corporate governance in frontier markets, we’d champion what we consider the positive influence of active management.

Looking back at the development of emerging markets in general over recent decades, the relationship between ownership and management has been an important one. We believe most of the positive change came because of the close collaboration between shareholders and the businesses, and the constant feedback both ways.

This is not something that can typically be achieved through a passive investing approach.

If you have a computer program directing investment decisions or an algorithm determining the weighting of shares, it raises the question of who is going to interact with management and who is going to vote at shareholder meetings on matters of corporate governance.