Wodd Of Opportunityln a new monthly feature, Global Finance delves deep into theopportunities in frontier markets. with youthful populations,underutilized natural resources and eagerness to join the globaleconomic community, the world's frontier markets are increasinglyattracting mainstream corporate attention.

s developed markets teeter on the brink of reces-sion and emerging markets struggle to maintain theblistering growth rates that made them the darlingsof investors and multinationals over the past two

, the corporate worldt attention is startingto focus on a new target: frontier markets.These new marketshold immense appeal for corporations hungry for growth.

The new frontiers are sometimes-aptly-compared to theemerging markets of 20 years ago.The potential for growthis clear, as is their propensity for providing companies withenhanced financial returns.As a result, frontier markets are thesubject ofGverish interest among investors.A recent $750 millioneurobond issued by Zambia,for example, was reportedly 20times oversubscribed. Stock indexes in the frontier markets areturning in some eye-popping numbers, too. According to theMSCI, between Janvary and mid-November 2012, Kenya'sstock market was up a staggering 55.7%. Others were almost asimpressive-with Kazakhsta n's up 38.2%, Estonia's up 29 .2%,Ghanat up 24.8% and Botswana's up 1,7 .7%.

The case for financial investment in frontier markets is argu-ably strong, but the case for multinational corporate attentionmay be even stronger. According to John Kornet, founder ofthe Frontier Markets Compendium, which identifies 64 coun-tries as frontier markets, the demographics are among the most

attractive characteristics of the new markets."The median age inthe developed world is 44," he says. "In the frontier markets, it is22." The sheer numbers of people are compelling, too. Kornetestimates that more than3}% ofthe world's population is locatedin frontier markets countries.This youthful population translatesinto millions of workers as well as consumers, he asserts.

"Frontier markets also tend to have low debt-to-GDP levels,high economic growth rates when compared to developed andemerging markets countries, rapid growth potential and attr^c-tive valuations of local businesses," Kornet adds.

It is these last two characteristics that most clearly highlightthe immediate opportunities frontier markets present for estab-lished developed-markets companies. However; building a toe-hold in a new market, parttcuTarly one that is still in the veryearly stages of its economic developmerrt,can be extremelychallenging, says Ryan Hoover, portfolio manager at US firmAfrica Capital Group. "Most companies tend to enter a newmarket by buying a stake in a local company and developing apresence in the market through that company," he notes.

Teaming up with a locai firm has many advantages. For exam-ple, a domestic outfit should already be adept at navigating localregulations and markets. It can help overcome or even negatea language barrier, and it will give the foreign company localcredibility and access. But although this approach can represent a

30 | Global Finance I January2013

 

neat shortcut, it carries its own risks, and finding the right localpartner is perhaps one of the biggest challenges a company willface as it tries to enter a new market.

As frontier markets get more attention from investors andmultinational corporations ahke, organizations are emerging thatcan help identify the best local partner. Britain'sTullow Oil, forexample, has recently established an initiative called Invest InAfrica to help MNCs find appropriate partnerships.And thereis a growing army of advisers focused on the frontier marketswho can help devise the best strategy for harnessing a newmarket's potential.

HOW BIG IS BIG ENOUGH?One of the key questions is whether the market is large enoughto absorb a new entrant. Often the ofiicial economic data givethe impression that a market may not be big enough or maynot be growing fast enough to justifit an investment. However,publicly available macroeconomic data rnay be misleading, saysAlison Graham, chiefinvestment ofiicer at frontier-markets fundmanagerVoltan Capital Partners: "The headline numbers oftendon't tell the whole story. Consumers in developing countriesoften have more disposable income than the overall GDP-per-capita {igures would suggest," she comments.

Hoover says Africa's new markets are a case in point:"Companies are finding there's a lot of money there eventhough, on an individual basis, people dont appear to have a lotof spending money." Noting that multinationals such as lJnileverand Nestl6 are becoming expert at targeting the so-called bot-tom of the pyramid, Hoover adds that consumers in develop-ing markets "tend to be very brand-conscious and aspirationalin their purchases. Retailers are finding very fertile ground inAfrica right now" he adds.

According to Graham, it is not just the brand but the qualiryof the product that is important: "People in newly developing

markets are well aware of the quality ofwhat they're buying and,if they have the money, are quite prepared to pay a little more forhigher-quality products," she explains.

But how much extra they are prepared to pay may be a lot lessthan many companies would need tobalance the cost of entering the market.Demand for higher-priced importedor foreign-branded goods may alsobe quite fragile. "When money's tight,people in frontier markets will quicklyshift back to buying the cheaper,lower-quaiiry products," Graham cautions.

REALITY VERSUS HYPEWith all the hype around frontier mar-kets in the investing world, it's temptingto treat such markets homogeneouslyand view them as sure winners over thelong term. Baldwin Berges. managingpartn er of fron tier-markets investm entmanager Silk Invest, argues stronglyagainst that perception:"It doesn't makeany sense to treat all frontier markets asa single asset class.'We encourage peopleto forget about indexes and really gowhere there is economic growth andopportunity," he says."Peopie do needto categorize things in order to under-stand them, and indexes help them todo that, but ifyou're serious about investing, you have to lookbeyond the indexes."

And if there is one characteristic that all frontier marketscountries share, it is that, ifyou want to invest there, you haveto be serious. I

Graham, Voltan: Consumersin developing countriesoften have more disposableincome than overall GDP-per-capita figures suggest

Hoover, Africa Capital: Mostcompanies tend to entera new market by buyinga stake in a local firm anddeveloping a presencethrough that company

January2013 | Global Finance | 31