What role can or should frontier markets play for investors interested in the world beyond the developed economic space? A conference recently examined this issue.

Emerging and frontier markets haven’t always been a happy hunting ground for investors in recent years but opportunities continue to be broad and some nations, such as those within the frontier sector, offer rich promise for people willing to take a long view, be mindful of risks and take the trouble to work with local experts, a WealthBriefing conference has heard.

Mixed performance by some emerging market economies – falls in Brazil and Russia, gains in India and gyrations in China – haven’t always made for comfortable journeys for investors who moved into these areas when developed economies were hit by the 2008 financial blow-up.

But the medium-term case for exposure to some of the fastest-growing countries in the world economy, obtaining diversification and necessary growth, remains powerful, delegates attending the WealthBriefing Investment Strategy Summit on 11 June were told. 

The conference featured a panel of prominent figures in the emerging and frontier investment space in wealth management: Andrew Beal, director and deputy head of emerging market equities, Deutsche Asset and Wealth Management; Ian Beattie, co-chief investment officer, managing partner, NS Partners; Nicholas Paris, director and portfolio manager, LIM Advisors; Dominic Scriven, chief executive of Dragon Capital. Stephen Harris, chief executive of WealthBriefing, chaired the session.

Conference sponsors were Dragon Capital; smartKYC; BB Bellevue Asset Management; ETF Securities; Lyxor, and Pulse.

A theme of the panel discussion was how an up-and-coming country such as Vietnam, once associated with geopolitical strife, has become an important economy in the ranks of “frontier” markets and requires close attention to detail from interested investors.

Dragon Capital’s Scriven spoke of how the Southeast Asia region is starting to see the kind of economic integration that is a market of progress, and he picked the example of air travel to make the point. 

“What I have noticed, for example, is the integration of air travel. It is now possible to fly from secondary to secondary cities in Europe and you can see this starting to happen in the ASEAN region,” Scriven said. 

As far as Vietnam is concerned, Scriven said attention to local cultural, legal and social factors is essential for investors to make money in the long term. In particular, he said due diligence checks takes a high priority and can never stop. Due diligence is “like painting a bridge…you finish it and the you have to go back and start all over again,” he said. “Diligence is about awareness of risk….in a way you have to embrace the risk and learn how to mitigate it. If we wanted to avoid risk we wouldn’t be there!”
 
Scriven, warming to his theme of attention to local factors, gave the example of the importance of women in economies such as Vietnam. He said there is an “extremely high role of women in business” and noted that there is a wide diversity of opinion going into business decision-making. 

To run portfolios of investments in countries such as Vietnam is a labour-intensive task, Scriven said: ““We run just over $1 billion of assets under management and have about 100 people; we need to do a lot of in-house work.”
 
In general, Scriven said that Vietnam had a difficult period in the global financial crisis but it is well positioned to accelerate, he said. “The Asian financial crisis [1997-98] was a huge learning experience for Asia…in the Asian psyche, it was a period of immense humiliation. In Vietnam, we have been through a rough time over the past five years but its issues have been domestic. It is the only country I know that has jailed bankers,” he said. 

LIM Advisors’ Paris also picked up on the Asia theme and referred to Vietnam in particular.

“We are seeing a lot more foreign investment flows inside the Asia region than before but at the moment money has been reallocated from South Asia to China. I think that is why Vietnam has gone sideways in the last 12 months,” he said. 
 
“Due diligence in emerging/frontier markets is ongoing and you have to keep doing it,” he said. Investors must consider three issues: is an economy stable, can investments be protected and are there stable rules and laws? A question to ask, he said, is are there restrictions on putting money into an economy and on taking it out? 
 
“We are fully invested in Vietnam. Everybody’s growth [in Asia] depends on China. Vietnam has a border with China….there are China-owned factories in Vietnam,” he said, noting that relations between the countries can be difficult. “They [China] do play games and they can make it very clear they are the dominant power in Asia,” Paris said.
 
“You can agree that Vietnam is the new Guangdong in Asia but its potential is not all about cheap labour,” Paris continued. 

Asked about risks of emerging/frontier markets losing steam, such as if China or another big economy suffers a chill, Paris was sanguine: “I am not worrying about frontier markets stalling…I am more concerned about some of the mature emerging markets.”
 

One issue that arose, the panel heard, is how countries beat the “middle income trap” of when, after a period of rapid growth, a country stalls and fails to create the kind of middle class and mass market necessary for further growth. 

Paris referred to the example of Singapore as having beaten the “middle income” trap by its focus on developing in areas such as financial services and value-add services. “Singapore is cleverly turning itself into the Switzerland of Asia,” he said. There is great potential in countries such as Indonesia, he said, but "what they don’t yet have is the infrastructure. If the new Indonesia government gets it right, then it is a very exciting opportunity.”

NS Partners’ Ian Beattie also spoke on this “trap” point: “All countries have to get through their `middle income’ trap.” He referred to how some countries, after a period of rapid growth, can hit a ceiling when they reach about $10,000-16,000 income per capita and will need better quality institutions and other reforms to move beyond. “Whilst some get stuck here (Argentina, Russia) many successfully navigate this phase,” he said, giving the cases of the UK, Germany and Singapore. “Singapore is a textbook case of how to do this [escape from the `middle income trap’] although it is going to get harder for them from here as they are well into ‘rich country’ status….politics will probably be the key from here.”

This “trap” is not really a concern that comes up for a country such as Vietnam, which has yet to get to middle income, Beattie said.

Beattie was asked about the impact of trade deals involving Asian and other emerging market countries. “We haven’t had a big trade deal for decades……Doha was a flop….the world really needs a trade deal,” he responded. 

"The TPP [Trans Pacific Partnership] started life as a small trade deal amongst a handful of small pacific countries (Chile, New Zealand, Brunei and Singapore). Now, it’s a massive network of deals forming a super-regional trade deal encompassing 40 per cent of world GDP – and that's before China gets in,” he said. Vietnam is by far the largest beneficiary of the TPP, he said.

“For most people and most countries the constraints on trade are a drag. It's vested interests that oppose freer trade. It [free trade] is a force for good. For [social] mobility, for growth and for raising incomes. Not for every individual but for all in total,” he said. “The gains from reducing barriers and inefficiencies and increasing trade are staggering – analysts expect the gains from such trade deals [AEC and TPP] to start at $300 billion and could reach $800 billion if [they] became pacific wide by 2025,” he said.

 
DeAWM’s Beal was asked by the panel chairman as to how are Asian and other emerging markets performing. He said performance among emerging markets has been one of underperformance against global equities. “Within that, there has been significant divergence within regional markets,” he said.

“Regionally, Asia has outperformed Latin America and Eastern Europe. The story of performance has been essentially about that of Asia,” Beal said.
 
“We have seen underperformance in resources and commodities,” he said, referring to how weaker prices for commodities such as oil have affected exporter nations (such as Indonesia). 
 
“They [Asian emerging market countries] tend to have better demographics than emerging markets [as a whole],” he continued. 
 
“We have seen some outliers from Asia,” he said, citing those countries affected on both sides by weaker commodity prices. “The last few years have been pretty tough for many emerging markets.”
 
Frontier investing is getting more attention due to widening awareness – there is a structural force pushing this asset class, he said.
 
It is hard to pick a bottom in performance of emerging markets – the slowdown in the pace of the Chinese economy will have “huge implications for emerging markets in general”, he said.
 
“What the [Chinese] slowdown has tended to point to is a fall-off in investment…the China story is a copy of what we have seen in other markets: high investment, property bubbles. ….only when there is a better quality of investment is that environment improving,” Beal said.
 
Asked what has changed since the 1997-98 financial crisis in Asia, Beal said the “significant difference is that, on the whole, Asia is a net creditor to the rest of the world and has huge foreign exchange reserves. There is a huge and growing domestic pool of savings. These markets are not reliant on our capital any more and that is a significant difference.”

Capital markets have become more sophisticated; there has been some disintermediation of the banking industry since 1997-98, Beal added.