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Mark Mobius on Investing in the 'New Frontier'

July 03, 2012 | About:

The developed world for the most part seems destined for pretty weak economic growth for the foreseeable future. I guess that should not be a surprise since we enjoyed a debt-fueled boom for the decades leading up until now. As we deleverage, our growth has to slow.

The developing world on the other hand is experiencing and will likely continue to experience much faster growth rates as billions of people rush towards the North American lifestyle as quickly as possible.

But is it worth trying to jump on the faster moving train? It can clearly be more risky to do so given the heightened levels of fraud and political risk involved with doing so. And quite frankly, I’m not sure I can stomach any more volatility than I have found investing in the energy sector over the past half decade.

Mark Mobius is the guru of the emerging markets and he weighs in on investing not in emerging markets, but the even more wild “frontier markets”:

In a recent interview, I was asked whether I was becoming a “frontiersman” in my quest for the next big investment opportunity. It’s true that many of my recent investment adventures have taken place in frontier markets – the smaller, less-developed cousins of the emerging markets. I view frontier markets as having tremendous potential for long-term investors, if — and this is a big “if” — you are able to be patient and show some perseverance. Just a few decades ago, China and India were considered frontier markets, and when I began my investment career Japan was considered an emerging market. So, you can see how economic progression and market development often go hand in hand.

Frontier markets could be viewed as a subset of emerging markets. Frontier markets are generally less liquid and have lower market capitalizations than emerging or developed markets. A country’s classification as “emerging” or “frontier” is generally based on criteria such as economic development, size, liquidity and market accessibility. The MSCI Frontier Markets Indices1 provide a handy benchmark for investors and have their own criteria to determine classifications, but they are not something we strictly adhere to.

As frontier country income levels rise, and frontier stock markets become more developed and easily accessible to international investors, these markets could transition to the status of emerging market.

[i]One might make the mistake of associating frontier markets with impoverished nations, but in fact, they encompass a broad range of economic development, ranging from countries where the average citizen’s yearly income couldn’t buy a used car, to some of the wealthiest countries in the world. Frontier markets span the globe, including Panama and Argentina in Latin America, Bulgaria and Romania in Eastern Europe, Saudi Arabia and Qatar in the Middle East and Cambodia and Vietnam in Asia, to name a few. Africa is an area of particular interest to me right now. All of the nations in Africa, with the exception of South Africa, can be classified as frontier markets. Africa is a very fast-growing region—from 2001 to 2010, six of 10 the fastest-growing countries in the world were in Africa.2 So we are very excited by the growth prospects in those countries. (See my three-part series “Investing in the Cradle of Civilization” for more on Africa.)

Link to full article: http://mobius.blog.franklintempleton.com/2012/07/03/frontier-markets/?nicamp=other&nichn=twitter&nismseg=mm%20frontier%20post

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