What About Africa?
Africa (excluding South Africa) better fits most people’s vision of frontier markets. Many countries in the region have staggering natural resources and underdeveloped economies begging for infrastructure improvements. The population skews young and is growing rapidly. GDP growth can be spectacular: Nine of the 20 fastest-growing economies in the world are in Africa, and a half-dozen countries have delivered consistent GDP growth exceeding 5 percent for the past 10 years.
The story more recently has been mixed. A handful of African nations have delivered spectacular returns both last year and on a trailing 5-year basis. Ghana, Kenya and Mauritius have all been performing very well recently. It’s worth noting that Professor Roubini called out Ghana and Kenya as potential areas of interest at our breakfast.
But the African story is mixed. For every Ghana posting 61 percent returns last year, there is a Morocco falling 8 percent or a Nigeria going flat.
Can You Really Buy The Growth You Want?
Which brings us to the final point: I don’t think most investors know what they are buying when they buy frontier market ETFs. FM is clearly better than FRN – despite the name - but my gut tells me that people are hoodwinked a bit by FM as well. My guess is most people are trying to buy into under-developed economies with enormous potential … places like Ghana and Kenya … when in reality, they’re mostly buying into Gulf countries. It’s better to be lucky than good, but people should recognize luck when they see it.
Importantly, FM – and the index it tracks – will change dramatically in May, when the MSCI plans to reclassify the UAE and Qatar as emerging markets. Together, they make up 35 percent of FM’s portfolio and almost all of its strong returns in recent months.
The new portfolio will be more frontier-y. It will be closer to what investors want. The question is: Will that be a good thing or not?