Investing Where Others Fear to Tread

I’ve been given many humorous nicknames over the years, including the “Indiana Jones of Emerging Markets Investing” and “the Yul Brynner of Wall Street.” I’ve even been the subject of a comic book: Mark Mobius - An Illustrated Biography of the Father of Emerging Markets. All of those are glamorous creations, but the moniker I favor these days is “frontiersman.” In our quest for investment opportunities, my team and I have been looking far off the beaten path in places such as Nigeria, Egypt, Vietnam, Kazakhstan and Bangladesh, to name a few. We consider these to be “frontier markets,” which are generally less liquid and have lower market capitalizations than other emerging or developed markets. Economic development, size, liquidity and market accessibility are the criteria which generally determine whether a country is classified as “emerging” or “frontier.”

Many people consider these markets “dangerous” from an investment standpoint and even dangerous to visit. It’s true that you have to be careful on both counts, and keep your eyes open, but that can be true anywhere. I have found that oftentimes, news headlines aren’t always reflective of what’s going on throughout a society. For example, a common misconception about Africa is that the entire continent is plagued by social ills. We don’t deny that violence, political unrest and poverty exist in places there, and we have to be cognizant of these serious issues. But that’s not the whole story. Africa not only has natural beauty and cultural diversity but in our view, has great potential business and investment opportunities. Sometimes a frightening experience can open your eyes to opportunity. For example, recently in a hotel in Lagos, Nigeria, we were stuck in an elevator. The electric power cut because of the problems of electricity supply in the city and a breakdown in the hotel’s diesel generator. Obviously that’s a business opportunity for any company able to supply reliable electric power.

When I speak enthusiastically about investment opportunities in Africa, particularly in Nigeria’s banking sector, I often get quizzical looks. Nigeria has experienced a banking crisis, and corruption does exist there (as it does in many places all over the world). The good news is that leaders there and elsewhere in Africa appear to have been working to clean things up and put criminals in jail. Much (if not most) of the population in Nigeria and other parts of Africa lack access to a banking account, and mobile phone use is on the rise—often as the sole device for quickly communicating with friends and family, entertainment, as well as banking and business transactions. So from our view as investors, there is potential in the intersection between the banking and telecommunications sectors there. In addition, tastes are evolving among Africa’s growing middle class, so food and beverage companies are also of interest to us. For example, Nigerians have a particular thirst for one of Ireland’s iconic domestic beers—more is consumed there than in Ireland!

As with all our investments, we must do our homework. We examine the fundamentals unique to each country, and for each company we examine a history of profit/loss statements, balance sheets, and other materials to support a five-year forecast. We also personally visit as many companies as we can and certainly every company in which we invest. It’s an intensive process. In particular, we look for companies that appear to have solid long-term growth prospects (supported by a youthful population and rising middle class) and good corporate governance. We also favor a culture of dividends.

When you consider the growth rates of many of these frontier countries, it makes sense to us to be on the hunt for opportunities there. The International Monetary Fund (IMF) has projected that during the next five years, 10 of the world's 20 fastest-growing economies will be in Sub-Saharan Africa. [1] Just compare the GDP growth projections in these countries with that of developed markets, and you’ll see an (often stark) contrast.

There’s one last important point worth mentioning. Frontier markets are not only confined to impoverished nations with extremely low bases of GDP. For example, in the Middle East, Qatar and Saudi Arabia—two of the richest countries in the world—are also considered frontier markets. With that diversity also comes a broad range of potential investment opportunities.

There’s still a lot of work to do in these markets. Investors need to possess a strong stomach for volatility and the virtue of patience to invest there. One of the many things I learned from Templeton’s founder, the late Sir John Templeton, is that in search of the best opportunities, you sometimes have to go where others fear to tread.

Important Legal Information

Dr. Mobius’s comments, opinions and analyses are for informational purposes only, may change without notice, and should not be considered individual investment advice or a recommendation to invest in any security or to adopt any investment strategy. Information contained herein is not a complete analysis of every material fact regarding any country, region, or market. All investments involve risks, including possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging market countries involve heightened risks related to the same factors, in addition to those associated with these markets' smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets.