Less developed countries or the more politically correct term, Emerging markets, refer to countries that have some characteristics of a developed market, but do not meet standards to be a developed market. Frontier market is used for developing countries with slower economies than those of emerging countries.
This is a bit of a subjective classification. What are generally considered to be obvious examples of each category are:
- Developed – U.S., Japan, Canada, U.K., France
- Emerging – India, Russia, Brazil, china
- Frontier – Kenya, Cote de Ivoire, Nigeria
Capital Investment Opportunities
A colleague and I recently had a fascinating discussion about the advantages and disadvantages of investing in Emerging and Frontier economies.
The number one benefit is the opportunity for outrageous returns. Return on capital of 1000% is not unknown – this over a short term of 5 to 10 years.
Of course the risk of losing everything is very high. The more “frontier” the economy the greater the risk. In short investing in emerging or frontier markets follows the basic axiom; high risk, high reward.
Mitigation
A key driver of the potential for poor results or significant losses arises from the environmental unknowns. Things like political maneuvering, cultural norms (e.g., are bribes allowed, even expected), material constraints and so on.
My colleague suggested these risks can be easily overcome by employing locals inhabitants or management firms who can guide your investment past the trip wires.
My question was, why would I take these risks when my North American investment capital could return me 100% over 5 to 10 years with none of the environmental risks or unknowns?
Simply put why venture into the unknown when the known works just fine. I guess ultimately it boils down to your appetite for risk.