Investment Banking's New Frontier
|Nov 30, 2010|
Gold is expensive. So too is palm oil, bond yields nearly nothing, bank deposits are a sure way to lose money. Major stock markets have rebounded and buyers are now bored with BRICS. The shine has even gone off the China market and its currency is going nowhere. Japan's market remains out of favor, not least with the Japanese themselves and in Europe the ragged tails, Ireland and Portugal, are wagging the dog into a Euro tizzy.
But brokers must have something to sell. So what better to move on from Emerging Markets like Turkey, Colombia, Chile, Indonesia, which have become old news, to the "new frontier" – the so-called Frontier Markets.
Definitions of these destinations vary widely, and so does their performance. One list even includes Argentina, which has had an active bourse since 1854 even if at times it has been submerged by bouts of wild inflation and Peronista populism. Then at the other end of the scale there is Rwanda, where trading is supposed to start imminently in Kigali, its capital, even if the only listing is the cross-listed, Nairobi based Kenya Commercial Bank.
And, as some emerging markets have continued to emerge for the last 30 years, some of these markets are going to stay on the frontier for about the same length of time. The amount of reliable and accurate research on which the investor can depend – an oxymoron for investment banks in the first place – falls exponentially the closer you get to the frontier. And if the corporate governance in, say, Indonesia – an emerging market – is wild, on the frontier it is even wilder. Minority shareholders, beware.
In Asia the frontier flavor of the moment is Mongolia, whose three million people are blessed, or cursed, by huge reserves of coal, copper, gold and lesser-known minerals such as molybdenum and antinomy – and which needed an IMF bailout in the wake of the global credit crisis two years ago when its banking system and economy almost collapsed, and where inflation hit 30 percent annually in 2008.
Not only is it fast developing its resources and hence can look forward to years of trade surplus, it also lies next to China, whose demand for ever increasing volumes of these minerals is now known to every taxi driver between Chicago and Chengdu. So folks are piling into Ulan Batur before it's too late – even if the market is already up sharply this year. Like other markets based almost entirely on commodity prices, could it not collapse if the mineral price bubbles burst?
No worries. Mongolia lies on the ancient Silk Road linking China with central Asia, the Middle East and Europe. There is now a train line linking it to Russia and China and highways are being built too which will make Ulan Bator into a great modern caravanserai. But don't tell anyone that this railway line has existed since 1961.
Maps with railway and road lines, existing, planned or imagined, are a stock in trade of frontier salesmen. So there is also much talk about how Asia will be joined up even closer by railway links which will take people and freight all the way from Singapore to Ulan Bator and beyond, via Thailand, Laos, Cambodia, Vietnam etc. What they don't tell you is that much of it is single track and comes in three different gauges – 1-meter in Southeast Asia, standard gauge (1.435m) in China and broad gauge (1.520) in Mongolia, Kazakhstan and Russia.
Small size also has an attraction to frontier salesmen. Another hot tip of the moment is Mauritius, the Indian Ocean island with a population of 1 million. Mauritius has been on a few investor radar screens for a decade or more. Not only is it a well-run little country but with its position equidistant to India, the Gulf and Africa it is a genuine crossroads offering Indians in particular the kind offshore financial facilities that Americans find in the Caribbean. But with a market cap of just US$5 billion and listing dominated by financial services it is no surprise to find that this frontier too is no longer very appealing for anyone looking for medium term profits rather than sheer novelty.
Small population is definitely not a problem for Bangladesh, a market which had a boom and bust back in the mid 1990s and was favored by much quoted, self-styled iconoclast investor Marc Faber. The Dhaka market has been growing apace thanks to privatizations as well as the nation's steady economic growth and influx of remittances. But do not imagine that Bangladesh is any more immune from the global liquidity binge than most other markets. The Dhaka market index has already doubled over the past year and nearly tripled over two years and now has a market capitalization of some $30 billion or 45 percent of gross domestic product.
Much the same can be said of the Sri Lanka market which was propelled from under 3,000 to 7,000 over a year in response to global liquidity and the defeat of the Tamil Tigers. It has since retreated by 15 percent of so but cannot be classed as a bargain basement market, even if it does qualify for the frontier tag.
Indeed, so ubiquitous has the money surge been that it even drove what it perhaps the most politically incorrect market to an all time high in mid-2010 – though it has since slipped back. This one does not get many mentions in the frontier lists but is in fact much larger both in capitalization and turnover than most of the frontier ones. That is Tehran – which foreigners can at least in theory invest in unless their own government forbids investment in this particular axis of evil.
Of course there are many more frontier markets on the lists of the salesmen. From Benin and the Cape Verde islands to Jamaica, Tanzania, Trinidad, Kazakhstan and Croatia, not to mention such better known spots as Egypt, Vietnam, Pakistan and Saudi Arabia.
Maybe on a 20-year view some are the wave of the future. A few, such as Vietnam, are far from past peaks and may have scope for recovery. But given the mix of cheap money and sky-high commodity prices which have been the driving force, the time to invest in utterly boring companies like Toyota and Procter and Gamble may be upon us. The frontier is a dangerous place. Those who get there first get the spoils – and that won't be those who listen to brokers looking for new lines to sell.