With a quarter of a decade experience in financial services and alternative investment Scott Tominaga has taken it upon himself to talk about the details of frontier investment. Frontier investment refers to investing in markets that are considered to be at an earlier stage of development. Frontier markets typically include countries that are in the early stages of economic development, such as those in Africa, the Middle East, parts of Asia, and certain regions of Latin America.
These markets may benefit from factors such as demographic trends, urbanization, increasing consumer spending, and natural resource wealth. This is how Investing in frontier markets offers the potential for high growth and attractive returns. However, they also come with their significant risks. But it is surprising to note that despite these risks many investors are attracted to frontier investment. This is particularly because of its potential to diversify portfolios, capture growth opportunities, and generate alpha.
The Opportunities in Frontier Investment
- High Growth Potential: With growing populations and rising middle classes, frontier economies offer novel opportunities for companies. They make available the chance to tap into new markets and expand their customer base.
- Undervalued Assets: The fact that frontier markets are often overlooked and undervalued by mainstream investors is a blessing in disguise. Scott Tominaga explains that this leads to attractive valuations and potential investment opportunities. Stocks, bonds, and real estate assets in frontier markets may offer compelling returns. This is a strong difference from their counterparts in developed and emerging markets.
- Diversification Benefits: This diversification ability helps to reduce portfolio risk and enhance returns. Frontier markets have a low correlation with developed and emerging markets. That is to say that they may perform differently in response to market fluctuations, providing diversification benefits to a global investment portfolio.
The Risks in Frontier Investment:
- Political Instability: This instability includes civil unrest, government corruption, and regime changes. Volatility in financial markets, disruption in business operations, and undermining of investor confidence can be a result of this.
- Regulatory and Legal Risks: Scott Tominaga from his knowledge and experience, suggests that the regulatory features of such markets may be less developed and transparent. This he says when studying a comparison with those in developed economies. He goes on to acknowledge that such conditions pose risks for investors in terms of legal protection, property rights, and contract enforcement. Investment returns and business operations are largely impacted by regulatory changes, government intervention, and arbitrary rule changes.
- Currency and Exchange Rate Risks: This is because fluctuations in exchange rates can affect the value of investments denominated in foreign currencies. Investment returns and purchasing power can be eroded by the depreciation of local currencies against the investor’s home currency.
- Liquidity Constraints: Frontier markets may have limited liquidity and trading volumes. This makes it difficult for investors to buy and sell securities at desired prices. Lack of liquidity can exacerbate market volatility, increase transaction costs, and limit investors’ ability to enter or exit positions promptly.
Frontier investment offers investors the opportunity to access high-growth markets and diversify their portfolios. Nonetheless, it must be remembered that it also comes with risks and challenges that require careful consideration.