A decade or so ago, Wall Street regarded emerging markets as a single amorphous entity. If there was trouble at one end of the globe, you sold all across the world. Those markets have now emerged as Asian Tigers and BRICs (Brazil, Russia, India and China), a better investment than the troubled Eurozone and US. And spreading beyond the BRIC boundaries are the ‘frontier markets’ where investors desperately seeking alpha boldly go where no one has gone before.
IR magazine decided to look beyond the final frontier, where only the brave venture –and found there are more of the brave than ever before. ‘The level of investor tolerance is much higher, even though the impact of risk is no less,’ says Anne Fruhauf, Eurasia Group’s Africa analyst. ‘There is more willingness to differentiate in their investment and be much more tolerant of risk, looking more seriously at different sub-sectors that could be safer political bets.’
She cites Côte d’Ivoire, the former jewel of Francophone Africa, where the defeated presidential candidate was forced from power by a combination of the opposition, the French army and the UN. Rather than cutting and running, investors seem to be channeling Rudyard Kipling, keeping their heads, when all about them are losing theirs.
‘From the sidelines, investors are very interested in, for example, the Côte d’Ivoire Eurobond, which had a very attractive yield last year, before the big crisis,’ explains Fruhauf. ‘The most risk-averse investors took their money out before the second round. Others, the old Africa hands, took their money out at a high, to buy back in at a low. Some people have been trying to stick it out, but they’re wondering how long to stick.
‘The longer-term view they are taking is very instructive. There are lots of investors actively monitoring and ready to pounce back in the moment they see some kind of improvement. Côte d’Ivoire shows how vulnerable every sector is to severe political instability, but then the question becomes: how deep does the crisis have to be to completely derail things?’
Set against the political instability is, of course, the worldwide commodity boom. Côte d’Ivoire produces not only wobbly governments but also oil, coffee, cocoa and metals, all of which, Fruhauf points out, ‘are on a roll.’
‘The last two or three years, there’s been a lot of reengagement, reports from the IMF and World Bank that tended to stabilisation and attracted people beyond the traditional cocoa sector, such as small and medium miners and a new kind of investor,’ Fruhauf adds. ‘Even Indian car manufacturer Tata was looking at the country.’
The West’s sweet tooth for chocolate has helped to keep things ticking over, she continues. ‘Despite sanctions, conflict in the main cocoa growing areas and the outgoing president’s attempts to seize assets, the harvest has been quite good and the cocoa is trickling out, a lot of it smuggled. Our information from Abidjan is that, provided the situation is resolved in three months, the total harvest might not be that bad.’ And of course, oil production continues, as it seems to in all circumstances short of all-out war.
At the February investors’ conference for Timor-Leste in New York, it was clear this region was beyond the event horizon for many investors. One banker who wandered in to hear the country’s prime minister speak asked whether it was in Africa; it is not. The ex-Portuguese colony was occupied by its western neighbour, Indonesia, for decades. It definitely has location on its side: south of Singapore, north of Australia and directly above major oil reserves, which have been swelling its newly established sovereign wealth fund (SWF).