Fdc White Paper

9 Murray St, New York, NY 10007

Tel: 855.935.5997 • [email protected] www.frontierdatacorp.com

TERRA INCOGNITA: INVESTMENT AND TRADING STRATEGIES IN FRONTIER MARKETS

www.frontierdatacorp.com • 855.935.5997 • [email protected] • 9 Murray St, 2nd Floor New York, NY 10007 Frontier Data Corp, Copyright 2013

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FRONTIER DATA CORP


New York • Washington, DC • Dubai

FRONTIER DATA CORP: MAPPING TERRA INCOGNITA Early explorers and mathematicians relied often on imagination while mapping “terra incognita”—unknown lands beyond the reach of existing navigational methods and mapping tools. Financial institutions, corporations and governments today similarly deal with the challenges of “dark data” and informational black holes. Today’s decision-makers cannot however afford to rely on imagination and conjecture when making major decisions in emerging markets. Frontier Data Corp offers those decision-makers the opportunity to take action based on concrete, objective facts extracted from hard-to-access regions of the world.

Frontier Data Corp is currently covering dozens of emerging and frontier market countries globally, highlighted here in dark blue. We have developed a data collection system that breaks into the most impenetrable markets in the world to capture information typically denied to non-locals and non-native speakers. Our weekly dataset capturing 50+ data points across 30 countries offers unprecedented transparency in market price and consumption patterns across energy, food & beverage, real estate, consumer products, and transportation sectors in historically opaque markets. Our data reflects the underlying supply and demand conditions at work in the focal country while capturing the impact of major political activity that directly drive price movements. For example, we are covering several key data points in the “BRIC” countries and our data closely reflects the fact that owing to high taxes, Brazil’s electricity rates were recently the world’s third highest.


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FRONTIER DATA CORP



Figure 1: Electricity and fuel prices in Brazil, Russia, India, and China (Nov-Dec 2012)

Frontier Data Corp aims to be the indispensable navigational tool for all decision-makers pressed with challenges in frontier markets. We strive to penetrate the most opaque markets in the most promising centers of growth in the world, and we can deliver data unrivalled in frequency granularity. Our data is rich with insights about consumer demand, credit market trends, infrastructure growth, political and economic stability, and market opportunities. This paper provides a brief overview of our methods and capabilities, details how clients operating in emerging markets can use our data to secure strategic advantage in frontier market competition, and showcases some surprising pricing realities in the frontier markets. METHODS & CAPABILITIES

Granular collection Frontier Data Corp has been collecting weekly time series data in hard-to-penetrate emerging markets for over 6 months now. Data collection in each of our target markets is performed by carefully vetted, on-the-ground company sources with whom we’ve cultivated trusted relationships. Data collection sheets are highly scripted and simplified for ease of data entry and comparison. Data are collected from multiple sources, ensuring that outliers do not skew values

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disproportionately, and at least 5 or 6 additional metadata, such as geo-location, method, and time, are collected with each data type, to ensure validity and provide additional dimension to the overall series. Once data is collected, our analysts in the U.S. and Dubai perform a rigorous quality control process, comparing multiple data points against each other and against other countries to isolate and prompt investigation of outliers. Multiple iterations of collection are performed within each country until the data is free of error and its anomalies are satisfactorily explained. Validating government sources The problem of data absence is compounded by the nature of the government and economic bodies of these countries. In some edge states there is little to no government to speak of and no official data collection taking place. In states with weaker governments, data collection is very low on the list of government priorities and therefore does not occur or only occurs occasionally and unpredictably. For example, the Iraq census was carried out with severe methodological problems and was last implemented over 20 years ago. Once collected, data may be compromised in its recording and analysis. These problems may be due to benign inefficiencies and poor methodologies but they may also be a result of purposeful political attempts to control information, such as by systematically underrepresenting an ethnic group. Lead time on other data sources Where other major data sources and applications, such as official government figures, offer only monthly, secondary data, we provide weekly, primary data from on-the-ground, active sources unencumbered by bureaucratic interests and free from possible manipulation. Our data offers practitioners up to a three-week lead time on monthly reports and a ten-week lead time on quarterly reports offered by other commercial data reporting outlets. Furthermore, the data can be customized to meet specific individual requirements. As some of the most developed and transparent countries in the world fall short in consistent monthly data reporting, emerging markets lag even further. Regular financial reporting outlets typically simply recycle official government statistics, and as a result, investors and operators are left to wait out the reporting cycles determined by official government statistics offices—reluctant to take action on potential market opportunities in the meantime.


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Figure 2: FDC weekly inflation index – Vietnam (October 2012)

Inputs to advanced data analysis techniques Our raw data reporting can also be used as inputs into all major advanced data analytic tools requiring raw cross-sectional or panel data. Our continuous data series can be fed into proprietary forecasting models, while our cross-sectional data for over 30 countries can be used in simple comparative analysis for key macro-economic categories, or paired with advanced data analytics tools. News analytics and textual analysis techniques are useful complements to our data for uncovering hidden correlations and associative patterns linking political activity and market movements. Our data is fully customizable and exportable into Microsoft Excel, and we offer specialized services that allow clients to dictate collection requirements to acquire a specific dataset. For example, it is easy to compile a quick comparison of the costs of goods and services across countries, such as the comparison of home oil costs illustrated in Table 1. Table 1: Cost of one liter of home oil across select countries

Tunisia Israel Kazakhstan Pakistan Russia Lebanon Palestine S.Africa $6.37 $1.97 $0.62 $1.04 $6.52 $0.89 $1.74 $23.78

APPLICATIONS FOR FINANCIAL INSTITUTIONS AND HEDGE FUNDS

For finance professionals, “connecting the dots” and seeing hidden patterns in data is often the source of competitive advantage. FDC’s dataset can better equip those professionals to find signals in noise. We can provide inputs into decision-making models and tools that empower traders, researchers, bank professionals, and investment managers to exploit hidden opportunities in frontier markets. Cross-country comparative analyses We provide data easily convertible into ratios that normalize data across disparate countries, allowing the finance practitioner to easily benchmark and compare macro-economic data. For

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example, for all 30 countries, an analyst seeking to compare relative disposable income can rely on our salary data (e.g. for a police officer) as a multiple of a basket of cost of living goods. A sample cost-of-living ratio comparison is shown in Table 2. Table 2: Physician’s purchasing power in FDC coverage countries

Saudi Arabia

Egypt Syria Yemen Iraq Malaysia Myanmar

1.83x 1.74x 1.46x 0.32x 0.87x 7.34x 0.90x

In other words, a physician in Saudi Arabia earns 1.83x his cost-of-living per month; in Malaysia, a doctor earns approximately 7.34x his cost-of-living per month. Foreign exchange spreads—unofficial and official FX rates We provide weekly time series data on official and unofficial exchange rates in our coverage countries. With continuous tracking of spreads between the two data points, a client may be able to discern underlying patterns in the macro-economic environment, investor perceptions of the market, and the impact of state and central government decision-making. Figure 3 illustrates the spread between movements in the unofficial and official US Dollar / Vietnamese Dong exchange rate. Figure 3: Official and unofficial exchange rate VND: USD trendline through December

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Inflation tracker FDC offers a source of inflation tracking that is unavailable through other data vendors. Inflation figures reported by official governments often lack both transparency and reliability. We allow users to obtain unbiased data obtained directly from market-level sources. Without the filter of government channels, our subscribing clients have access to up-to-date consumer price data on a weekly basis and possess an information advantage over competitors relying on government statistics. We cover the following consumer price baskets which in various combinations constitute inflation indices worldwide.

Our inflation tracker combines our unique data with methodologies used worldwide to calculate consumer price indices.

Figure 4: FDC proprietary inflation tracker (July 2012- January 2013)

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APPLICATIONS FOR MULTINATIONAL CORPORATIONS

Our data is designed to help firms penetrate promising markets obscured by lack of data transparency. Some data continues to be collected by outside organizations such as international financial institutions, non-governmental organizations (NGOs) and the United Nations. However, this collection tends to be yearly and geared toward long-term development strategies—simply insufficient to meaningfully help an organization enter, or even fully understand, a developing market. By contrast, we provide a continuous stream of customizable data that conveys underlying political risk and macro-economic stability conditions. For example, we have observed wide dispersion in the price of one liter of unleaded gasoline across our core coverage markets, with Israel and Palestine ranking the highest in December 2012. Figure 5: Pump price of one liter of unleaded gasoline in select FDC countries

Pricing Warren Buffett once said, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.”1 Leading companies often lack systematic methods for understanding pricing—fewer than 5% of Fortune 500 companies have a full-time function dedicated to pricing,

1 A. Frye and D. Campbell, “Buffett Says Pricing Power More Important than Good Management,” February 18, 2011, http://bloomberg.com.

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according to the Professional Pricing Society.2 Furthermore, many companies distribute products into core markets knowing they will end up in another non-core market at different prices without knowing fully what drives the changes in those prices. FDC’s unique pricing data can remedy these information gaps and assist companies in identifying price patterns at the level of the end-user in those frontier markets. For example, we observed an average premium of about 43% for the price of an iPhone in Ethiopia over the same product in Brazil. Figure 6: iPhone 4S (16GB) prices at point-of-sale across select FDC markets

Credit markets and banking Consumer behavior in emerging markets is often closely linked to credit market development and the health of banking institutions. In countries where banking systems are opaque and a fundamental gap exists between media and government agencies and bank reporting channels, Frontier Data Corp delivers trustworthy, consistent information on metrics in consumer credit and bank lending patterns. For example, our data can be used to track weekly spreads between interbank lending, deposit rates, and consumer lending rates. Clients are able to observe the growth of bank capital and the ease with which consumers access credit by monitoring key spreads. For example, we observed an 11% difference in the deposit / consumer loan spreads

2 Andreas Hinterhuber and Stephan Liozu, “Is It Time to Rethink Your Pricing Strategy?” MIT Sloan Review, June 19, 2012, http://sloanreview.mit.edu.

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Point-‐of-‐sale price of iPhone 4S in select FDC countries (Nov-‐Dec 2012)


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earned by retail banks in Vietnam over the equivalent in Iraq—this data reflects a high level of cash hoarding by banks and a constricted lending environment in view of rapidly rising inflation toward the end of 2012 (CPI gained 7.08% in November from a year earlier). Table 3: Deposit and Lending Rates in select FDC countries

Country Deposit Rate (%) Consumer Loan Lending Rate (%) Spread earned (%) Iraq 1.0 Auto 5.5 4.5

Saudi Arabia 0.4 Credit Card 2.2 1.8 Vietnam 2.0 Auto 17.5 15.5

Colombia 0.0 Housing 12.7 12.7 Philippines 0.4 Housing 13.0 12.6 Cambodia 1.3 Housing 12.0 10.7 Myanmar 8.0 Housing 10.0 2.0

Israel 0.2 Housing 3.0 2.8

BEYOND THE BRICS: LOCAL DATA IN MACRO COUNTRY GROUPINGS The McKinsey Global Institute estimates annual consumption in emerging markets will reach $30 trillion by 2025, compared to $34 trillion in developed markets.3 Our data enables corporations to be uniquely positioned to seize those unprecedented opportunities in emerging markets and make informed decisions across areas of corporate and business strategy, investments, and political risk. For example, using the cost-of-living methodology, our data allows a client to apply a fine-grained approach to broad country groupings commonly used in economics and finance and observe underlying similarities and differences. The CIVETS countries include Columbia, Indonesia, Vietnam, Egypt, Turkey, and South Africa. We observed the following purchasing power parities for an entry-level police officer in each of those countries: Table 4: Entry-level police officer’s purchasing power in CIVETS (ex South Africa)

Columbia Indonesia Vietnam Egypt Turkey 0.51x 0.27x 0.74x 0.18x 0.55x

The data suggests that entry-level civil servant salaries equal roughly comparable household purchasing power across some CIVETS countries (notably Colombia and Turkey), but are considerably lower in others. For example, a police officer in Egypt has less than half the

3 McKinsey Global Institute, August 2012, “Winning the $30 trillion Decathlon”.


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purchasing power covering his monthly cost-of-living than a police officer in Turkey. Our data enables the user to penetrate these economies to deep levels, down to individual salaries and their respective costs of living. Figure 7: Food prices in select “Next 11” countries

Real estate & infrastructure Real estate investors seeking untapped markets where pricing data is unavailable can find key market information through FDC. Covering upmarket and downmarket commercial, residential and industrial real estate, we penetrate major centers of growth and deliver pricing data for standard properties. Furthermore, we collect data on infrastructure development trends, providing retail pricing for the cost of major building materials such as steel and concrete. For example, we observed high steel prices in Saudi Arabia on the back of strong domestic demand and the kingdom’s resilience to the global construction downturn, with multi-billion dollar infrastructure and private construction projects underway.

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Price per standardized unit (USD)

Food prices in select NEXT 11 countries (Dec 2012)

Milk (per Liter)

Chicken (per Kg)

Rice (per Kg)


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Figure 8: Building material costs in select frontier markets (all values USD)

Our data captures disparities in the cost of ownership vs. renting properties across our coverage countries. In residential real estate markets where property values can be significantly distorted by government-imposed rent controls and other interventions, we provide insights into relative pricing of property values in major cities for average urban dwellings and the premiums accrued by property-owners on those real estate assets. For example, our data allows a user to compare the ratio of the purchase price per sq. meter of up-market and down-market properties to the equivalent rental price, indicating potential under- or over-valuing of residential properties. In Indonesia we are observing that owners of residential properties pay 396x the rental price for one sq. meter of an average apartment dwelling. This may be attributable to artificial protection of land ownership resulting from the fact that foreigners are prohibited from owning high residential properties such as condominiums. Most residential condo complexes are not built on land with “Hak Pakai” titles that can be converted to foreign ownership.

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Table 5: Purchase-to-Rent ratios for one sq. meter of upmarket and downmarket residential property in major cities

Country Brazil Colombia Jordan Indonesia Philippines India Lebanon Tunisia Argentina Upmarket 250x 200x 9x 63x 27x 500x 187x 175x 89x

Downmarket 347x 218x 12x 396x 21x 167x 196x 134x 29x We also track the number of tower cranes found in capital cities, thus providing a ground up understanding of construction trends. Figure 9: Crane counts in select Next 11 countries (December 2012; most populous cities)

FRONTIER DATA CORP “EDGE” COUNTRIES FDC is currently positioned to be the leading provider of data in countries entering periods of dramatic economic transition and opening their doors to global investment and trade. For example, we are collecting data in Myanmar, a country in which the IMF estimated direct foreign investment to rise 40 percent to an estimated $3.99bn USD in 2012. We are similarly collecting in newly-emerging countries on the “edge” of global trade and investment owing to violent political transitions, such as Libya and Afghanistan, or continuous intermittent political violence, such as Sudan and the Palestinian territories. Our edge country coverage spans Asia, Africa, and the Middle East / North Africa.

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SURPRISES & “OUTLIERS” Companies and investors often benefit disproportionately from spotting opportunities where extreme data points lie. FDC’s dataset allows clients to instantly identify those points in our cross-country sample. For example, we observed electricity rates in the Philippines and Thailand to be priced at a premium of 233% and 200% respectively, over the median rate in our FDC coverage universe. Figure 10: Electricity rates per kilowatt-hour in select FDC countries

CONCLUSION

As most OECD markets are projected to experience anemic growth in the next decade, Frontier Data Corp is positioned to be a lead partner in helping companies and investors discover opportunities in countries that represent the future of 21st century economic growth. We are

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Electricity rates in select FDC countries


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embedded like no other company around the world, creating transparency with ground-level data that can drive sound investment and market entry decisions. To explore those opportunities with confidence, Frontier Data Corp is an indispensable navigational tool for steering through the complexity and risks involved in conducting business in the most difficult yet promising markets in the world.

Source: The Economist, The World in 2013

FDC is rapidly and continuously expanding its capabilities and offers a broad suite of customized solutions for its clients. We invite you to view our website and contact us with any inquiries or requests. For further information, please contact us by mail, email or phone:

Frontier Data Corp 9 Murray St, New York, NY 10007 Tel: 855.935.5997 [email protected] www.frontierdatacorp.com

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APPENDIX

1. Construction worker salary 19. Cost of chicken 37. Steel – 1 ton2. Lawyer salary 20. Cost of beer 38. Commercial down market - rent3. Police officer (entry level) salary 21. Cost of liter of cooking oil 39. Commercial up-market - rent4. Doctor salary 22. Cost of liter of milk 40. Residential down market - rent5. Soldier (private, infantry) 23. Cost of loaf of bread 41. Residential up-market - rent6. Ground transport - long distance 24. Cost of rice 42. Commercial down market - purchase7. Taxi trip - short distance 25. Cost of can of Coca-Cola 43. Commercial up-market - purchase8. New car cost, mid size 26. Cost of water 44. Residential down market - purchase9. Unleaded gasoline - liter 27. Cost of refrigerator, medium size 45. Residential up-market - purchase10. Diesel fuel - liter 28. Cost of desktop computer 46. Industrial real estate rent11. Hawalla or other money transfer 29. Cost of shirt 47. Cost for cell phone service, prepaid12. Personal bank deposit rates - local currency 30. Cost of shoes 48. Cost for cell phone service, subscription13. Personal lending rate - housing 31. Electricity rate 49. Cost of iPhone14. Unofficial exchange rate 32. Cost of personal generator 50. Cost of low end cell phone15. Sales / VAT tax 33. Home oil – 1 liter 51. Internet connection rates16. Cost of aspirin 34. Hotel room rate 52. SIM card17. Cost of penicillin 35. Tuition rate 53. Number of cranes in city18. Cost of doctor's visit 36. Concrete – 1 ton

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East Asia Middle East Africa Latin AmericaChina Syria South Africa Argentina

Egypt South Sudan BrazilSoutheast Asia Turkey Kenya ColombiaIndonesia Iraq Nigeria MexicoVietnam Saudi Arabia UgandaPhilippines Yemen Libya EuropeThailand Israel Ethiopia RussiaMyanmar LebanonCambodia Palestine South Asia Central AsiaMalaysia Jordan India Kazakhstan

AfghanistanPakistan

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