The world seems to be getting smaller. Investors are having the time of their lives: accessing the highly volatile markets and making double digit returns within less than a month, what one would expect over as a handsome reward over a period of five years from global market leaders. Morgan Stanley, it recently emerged, mopped up most shares of the Safaricom IPO in Kenya despite the fact the market was perceived as not ready for investors following the post election violence. Morgan Stanley was just one of the many foreign investors who are keen on frontier markets.
With the passing of global giants like the US, Europe, and Asia whose returns dwindle every year as efficiencies grip the markets, emerging markets are becoming less attractive while a new breed is on the rise. Frontier markets comprise of a few countries in Sub Saharan Africa, South Asia, Eastern Europe and the Caribbean.
One would describe such countries as being too young and untested to be described as emerging. However, most of them are on a growth path and will soon join the emerging peers.However, only the risk takers stand to benefit from their volatility and the reward pegged to them.
Frontier markets are known for their high illiquidity. Most of the markets record very low transaction volumes. With the exception of Kenya and Zambia for example, majority of the other frontier markets like Uganda, Tanzania and Botswana post very few or no transactions at all on a normal trading day. Trading in Kenya and Zambia was boosted by the listing of two large mobile phone operators; Safaricom and Celtel respectively which still account for most trades.
In addition to this, they are very small with only a few company listings. Kenya, for example, has slightly more than 50 listed companies while Uganda and Tanzania each have less than 10 listings.
In addition, most frontier markets are very risky to invest in. Take Zimbabwe for example. The country has yielded the best stock market return in the recent past despite highest inflation rates in the world and an economy at the brink of collapse.
Frontier markets present an economically viable untapped potential with long term benefits. What is even more exciting about them is that the whims, emotions and prejudices of the local investment community mainly determine how badly or well the market performs.
By Michael Musau
CEO Emerging Africa Capital
Licensed by The Capital Markets Authority as Investment Advisers
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