Analysis: Cracks start to show in frontier markets

Wed Nov 6, 2013 4:41am EST
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By Carolyn Cohn

LONDON (Reuters) - Three years ago, a trip to the Southern Kenya production facilities of Canadian company Africa Oil attracted only seven potential investors. Two months ago, 60 boarded the flight.

The investor trip, described by sales staff at Citi following a recent client conference, is just one illustration of the swelling interest in the most esoteric frontier markets.

In a world of low yields and paltry growth, the attraction of frontier markets - the lesser developed emerging markets in Africa, Asia, Europe, the Middle East and Latin America - is pretty clear. Juicy returns, often huge natural resources and young populations provide a stark contrast to the ageing economic profile in the West.

"Everyone and his dog seems to know something about (frontier markets) now," Citi wrote.

And yet, like many small, illiquid and often opaque markets, there's a problem. The surge in interest may already be in the price.

Frontier market stocks have outridden a slump in broader emerging markets this year, with help from long-term investors. Stars include Nigeria's Dangote Cement, up 48 percent, and Dubai's Emaar Properties, up 61 percent.

But these countries' restrictively tiny markets and increasingly pricey stocks are starting to dent their appeal.

"My best-performing stock this year has been a Nigerian cement company. Is that likely to be the case next year? I doubt it," Richard Titherington, CIO of emerging equities at JP Morgan Asset Management, told a recent media briefing.   Continued...