Investing in one of these markets is now so lucrative, you simply cannot afford to treat it as a mere option anymore. Investing in the other is fraught with tricks, traps and potholes. Plus, like Botox, nobody really knows its long-term effects. But if you know what to look for, you just might make a mint. Let the following be your primer.
Investing in emerging markets isn't optional anymore. Globalization means that countries once thought of as marginal are central to any smart investment plan.
What's still optional -- for now, at least -- are markets characterized as ``frontier.'' Frontier markets are young and thinly traded, with small numbers of stocks, poor regulation, unreliable financial reports and low levels of foreign ownership. In other words, mystery markets. But, like travel, they broaden the mind.
Who's on the frontier? Ukraine, Cyprus, Estonia, Kuwait, the United Arab Emirates, Ghana, Nigeria, Ivory Coast, Ecuador, Jamaica, Kazakhstan, Vietnam and perhaps two dozen more. Investment managers group them under acronyms: MENA, for Middle East North Africa; EMEA, for Europe (specifically, eastern Europe), Middle East and Africa.
Several indexes track these new markets. The S&P Frontier Markets Index covers 24 countries, including seven African states but none of the oil states in the Middle East. For the oils, check a smaller S&P index called Select Frontiers Total Return Index.
MSCI Barra launched a 19-country index last November, dominated by the five oil states whose markets are open to foreigners (that excludes Saudi Arabia). Merrill Lynch added its own 17-country index in March, the Merrill Lynch Frontier Index, also dominated by oil.
Each frontier country has a slightly different story with the common investment themes.
There's the commodities boom -- oil, of course, but also metals and agriculture. The consumer explosion -- rising urban middle classes snapping up cell phones, cars, television and appliances. Infrastructure -- the International Monetary Fund has forgiven much of Africa's debt, leaving these governments with surpluses to invest in electricity, telecommunications and roads. Finance -- with lenders prospering. Construction -- offices and apartment buildings, airports and shipping facilities. The MENA area's national bird is the construction crane.
Asset managers are pitching these markets as ``uncorrelated'' with those of the more developed world, meaning that stock prices there run on different tracks. They may rise when the more familiar markets are going down. In truth, however, we haven't had enough experience with frontier markets to declare them a potential cushion for bad times.
Read more at http://www.bloomberg.com/apps/news?pid=20601212&sid=a4sibrM7bph4&refer=home
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