Just as emerging markets dominated headlines in 2009, resource-rich frontier markets are quickly becoming “the” hot investment for 2010. Investors have flocked to these small, notoriously illiquid economies, seeking to get into the next China or Brazil at the ground floor. But with so much hype and misinformation surrounding the space, how can investors avoid getting burned?
Who better to ask than famed emerging and frontier market experts Mark Mobius? Known for his extensive expertise on international markets, Mobius was fund manager for the U.S.’ first ever emerging markets equity fund, the Templeton Emerging Markets Fund. Today, he serves as the executive chairman of Templeton Asset Management, where he manages more than 35 funds.
Recently, HAI associate editor Lara Crigger caught up with Mobius about the case for investing in frontier markets, including what makes a good frontier market, what connection they have to commodities, and why frontier markets offer lower volatility than many developed markets—including the U.S.
Crigger: So why should investors consider adding frontier markets to their portfolio? What’s the appeal of these tiny, illiquid economies?
Mobius: The first and foremost appeal is the valuation. In these markets, we’re able to find cheaper stocks that are significantly better valued than those in normal emerging markets. That’s not true of every single company, of course, but it’s certainly true of many.
Of course, the reason why these frontier markets tend to be cheaper is because they have not yet been fully discovered by investors. They tend to be under-researched, and not so readily available to normal investors.
Crigger: What do frontier markets offer investors that emerging markets don’t?
Mobius: Well, frontier markets are really just a subset of emerging markets. In the future, we expect these frontier markets—at least some of them—to become quite important, and to even become full-fledged emerging markets or greater.
When we started the very first emerging markets fund in 1987, at that time, it was impossible to find markets that were liquid and researched. So in some ways, we’re returning back to where we were at that time.
Crigger: Many frontier markets are very resource-rich. Do frontier markets make a good commodities play?
Mobius: The commodities arena is really very wide, and it includes normal emerging markets as well as frontier markets.