Forging Into Frontier Markets

By Aaron Levitt | September 08, 2010 AAA

With uncertainty still plaguing the developed world, many investors are looking towards the emerging nations for portfolio plays. The growth in nations like China and its respective equities like the SPDR S&P China (NYSE:GXC) is well known to investors. While China, Brazil and the rest of the BRIC nations still represent good long term opportunities, the earliest investors have seen the biggest gains. Those investors who can find the Chinas of the future will be amply rewarded. The question is where to look.

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Why the "Frontier"?
Those investors with long enough time lines, frontier markets such as Ukraine, Pakistan and Kenya offer a blend of various benefits for portfolios. These next in line emerging markets provide low correlations to both developed nations and traditional emerging markets. The MSCI Frontier Index exhibited approximately a 0.62 correlation with the S&P 500 versus 0.89 for iShares MSCI Canada Index Fund (NYSE:EWC) and 0.91 for the popular the MSCI Emerging Markets Index Fund (NYSE:EEM). These assets are also attractively valued compared with emerging markets.

Many of these nations are rich in natural resources. Nigeria is the tenth largest holder of oil reserves, Kazakhstan is rich in uranium and metals, and Argentina is a large grower of soybeans, corn and wheat. These commodity driven dollars spur new investment in infrastructure and create a burgeoning middle class. As the world continues to use natural resources at break-neck speeds, the demand for frontier markets goods will only increase, strengthening their position in the global economy. Adding to the excitement, many of these nations have adopted democratic and freer market policies.

Access to these nations can be difficult. However, local exchanges are gaining volume and accounting is becoming more transparent in most frontier markets. That said, political risks and market manipulation remain pressing issues. With investing in frontier markets, the long term potential is there. Retail investors do have some choices to add exposure to the sector.

Exploring the Remote Places
Many large cap companies have recently taken a shine to the frontier nations. International oil giants Eni (NYSE:E) and Total (NYSE:TOT) have made inroads into Angola, Ghana, The Republic of Congo, Gabon and Mozambique. Investors can get some exposure to fast growing frontier markets via these means. However, the best returns can be had by focusing on region or country specific companies.

The Claymore/BNY Mellon Frontier Markets (NYSE:FRN) offers a broad exposure to the frontier theme. The ETF follows 46 different firms from countries such as Chile, Lebanon, and Georgia. The fund has approximately 40% of its assets under management in financials firms. Expenses run 0.65%. Investors can also bet specifically on regions such as the Middle East with the Market Vectors Gulf States Index ETF (NYSE:MES) and WisdomTree Middle East Dividend (NYSE:GULF).

Africa Rising
Africa is often seen as the traditional frontier region and quickly becoming an attractive investment destination. A recent report from The International Monetary Fund wrote that "one of the least noticed aspects of the global downturn has been the resilience of the sub-Saharan Africa region". The region appears to be a "value' among emerging nations. The continents GDP is estimated to expand by nearly 5% in 2010, up from to 2% in 2009. Both the broad Market Vectors Africa Index ETF (NYSE:AFK) and South Africa focused iShares MSCI South Africa Index (NYSE:EZA) offer exposure to the continent.

Another Asian Tiger
With its low cost of labor, young work force and proximity to China, Vietnam could be a growth story to watch over the next few years. The nation's equity markets have struggled recently as the Vietnamese government took steps to rein in its growing trade deficit and protect against rising inflation. However, many analysts consider the countries stocks to be as cheap as they have ever been. The Market Vectors Vietnam ETF (NYSE:VNM) is a pure play on the nation's growth.

Bottom Line
As investors look to emerging markets to power their portfolios through the upcoming decades, they should also look towards the frontier. These next in line, developing nations offer a great way to diversify a portfolio while also capitalizing on long term trends. The previous exchange traded funds along with the Market Vectors Egypt Index ETF (Nasdaq:EGPT) offer an easy way to access these markets. (Pioneering is never easy, but it has its exciting - and worthwhile - moments for investors. To learn more, see Forging Frontier Markets.)

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