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How to Invest Inside Frontier Markets


There are certainly risks involved in investing inside frontier markets, but if you think you live in a risk-free environment now, think again.

I won't belabor the EMs. My prior commentary regarding the "New Second World" will suffice. In brief, these are large nations with large populations and large potential, but also with large problems. Their primary challenges are to deal with domestic pressures for more, more, more, while dealing with pressure from the DMs. In their all-absorbing desperation to survive the crisis they have created for themselves, the DMs will tend to drag the EMs down with them. But for today, an additional suggestion I would make is to be the first in your neighborhood to understand that "emerging" is the wrong word. They have emerged. Deal with it.

This brings me to the Frontier Markets. These are the nations where investing is most difficult. Many of their stock markets are too small, too illiquid, and too rarely followed to be of any use to DM investors whose "trading floor" is their computer monitor. Their companies that do trade locally are too small. In my new home nation, Panama, the local stock likely to draw attention from the DMs is COPA Airlines (NYSE:CPA), a rapidly-growing and very profitable regional airline, but you can trade COPA on the NYSE. Everything else gets ignored.

And yet, there is a lot of money being made now and yet to be made in many FMs that make them as attractive or more attractive than the EMs or DMs. Some people think that FMs are dirt-poor by definition. Wrong. In Panama, our 2011 per capita GDP (PPP) was $14,100. Brazil? $11,800. China? $8,400. India? $3,700. Only Russia leads us ($16,700) and, you can definitely trust me on this, no one in Panama is interested in trading economies or our young, modestly growing population with their aging, declining population, among many other things. Our continued double-digit GDP growth rate doesn't hurt either. Panama may be better off than many FMs, but it is not alone. From Mongolia to Sri Lanka, there are many options and they are bustling.

So how do you invest in FMs for maximum return? You don't. You invest inside an FM of your choice. You research, you visit, you choose, you move, you live where you will invest. If you are not part of the first wave, you can be part of the second and learn off the first. As I mentioned in my last commentary, my firm's surveys clearly indicate that you will not be alone as far as relocation is concerned. However, if you are a real investor, you will still be in a small minority and the potential can be far greater than in the DMs or EMs. But it is not a walk in the park.

This requires real work. If trading on a monitor is your sole approach to investing, this is not going to work for you. If your time frame for making the big bucks is measured in weeks or months, best to stay at home. If you can look out at least three years, preferably more, you greatly increase the odds of success. You are not there for the weather or the cost of living, you are there to personally research, visit, and inspect potential investments and still be there afterwards to monitor their progress. You are there to live and profit, but you have to contribute. For their sake and everyone else's, armchair analysts should remain firmly rooted to their armchairs.

There are certainly risks involved in investing inside FMs, but if you think you live in a risk-free environment now, think again. And the risks are declining as many FMs grow. The really good news is that with the profound ignorance or, at best, out-dated 20th century understanding of the FMs on the part of so many in the DMs, the competition is nowhere near as severe as in the DMs and EMs. As a result, the odds of an excellent return on investment are declining more slowly.

That's another way of saying that if very few of you decide to seriously consider this approach, I will shed no tears. The fewer who follow this advice, the greater the rewards for those of us who do. But if it sounds intriguing enough to act on, you're welcome to join us.

See more from Bob Adams at America Wave.

Twitter: @AmericaWave
No positions in stocks mentioned.
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