Dateline: Phnom Penh, Cambodia
While visiting Cambodia, my favorite frontier market, I want to talk to you about six reasons to consider investing in frontier markets.
One rung below an emerging market, frontier markets are slightly more developed than those of developing countries but usually too small to be considered an emerging market. Here in Asia, for example, you have Malaysia and Vietnam, which are both emerging markets, while Cambodia, with less infrastructure and less development, is very much a frontier market.
You only have to take a look around Phnom Penh to see that the place is starting to experience major development — with malls and restaurants cropping up all over the city — but it’s still a frontier market.
So why would you consider investing in what some people would call the riskiest of markets?
Well, here are six good reasons it might be right for you, and this is especially good advice for younger entrepreneurs or people who want a greater return on their capital and are willing to take a bit more risk.
1. Long-term growth
The biggest reason why you should look at frontier markets is the potential for long-term growth. Frontier markets are often called “pre-emerging” markets and for good reason. Imagine being able to get in on the ground floor in an emerging market like Thailand — well, they say Phnom Penh is the Bangkok of thirty years ago.
One of the things that’s going on all around Phnom Penh at the moment is developers coming in and buying up shops, houses, apartments, and small stores. These are people who want to build a new mall, skyscraper, or other big project and need bulk access to land.
I have a buddy who runs a property fund here in Cambodia, and he has been savvy about buying property in blocks in the right areas. His property fund is projected to return 10-12 percent every year, as a conservative baseline. And people in his situation can make two or three times the actual value of their property.
Now, there’s no guarantee that will happen to you; you also have to have the right investment strategy. Still, Cambodia could offer excellent long-term growth of your capital and over 10, 20, or 30 years, the potential here is huge. Again, look at Bangkok and compare the markets from the eighties to the more developed markets now. Then imagine how many times people have made their money back.
So, reason one: long-term growth.
2. Greater potential for yield
The same thing that makes frontier markets an excellent investment opportunity is the very reason fewer people actually invest: namely, the risk. However, this gives those of us with the appetite for a little risk another good reason to invest — less competition and a greater potential for yield.
My friend with his property fund can conservatively buy properties in pretty blue chip areas and get 10-15 percent rental yields unleveraged. Compare that to somewhere like the U.K., the United States, Australia, or, God forbid, Switzerland, where you might be looking at low single-digit returns. In a frontier market like Cambodia, you can expect to reap a good double digit yield while you’re waiting for that long-term growth to materialize.
3. Discrete markets
Another reason I like frontier markets is that the returns are often uncorrelated to the performance of other markets. Take the 2008 financial crisis or the Asian financial crisis; those didn’t affect Cambodia in the way they shocked more developed and conventional markets.
I don’t think that there’s been a single year in the last decade when growth in Cambodia hasn’t been at least 7-8 percent. It has even enjoyed double figures; in fact, it’s just been one big growth chart. Obviously, there are challenges, but if you know what you’re doing or you have someone who can do it for you, you can enjoy uncorrelated growth even while the rest of the world suffers. Investing in a frontier market may actually protect some of your investment in a way that a developed market can’t.
4. Diversification
If we take Cambodia again as an example, the country uses the U.S. dollar, so there’s not a lot of currency diversification if you’re holding U.S. dollars. However, other frontier markets have their own currencies, which means you can enjoy currency diversification in a frontier market.
Frontier markets offer a different type of environment than you’ve probably invested in before. So not only do you get a totally different growth profile, you get a totally different market type. By diversifying your portfolio from your average retirement account or 401(k), you can further balance the risk and reward profile of your overall portfolio.
5. Higher probability of success
When it comes to establishing an investment or setting up a new business, competition in traditional markets can be tough. In a frontier market, you have a greater probability of success — even with the most basic business. In fact, the opportunities for basic businesses and online services in a frontier market are huge.
So it’s not just about real estate; e-commerce and simple service industries all have a greater chance of succeeding in a market where competition is almost nonexistent. Not only that, but without running the risk of an economic downturn every seven or eight years — like we experience in the West — more businesses are likely to be able to ride out periods of global financial crisis.
6. Lower entry points
Obviously, it’s pretty easy to start a website these days, no matter where you are in the world, but you can open a physical, brick-and-mortar business for a heck of lot less in somewhere like Phnom Penh than you could in any city that has a developed market. If you want real estate here in Cambodia — good city center real estate — there are still plenty of great deals to be had. If you’re looking at doing the same thing in Los Angeles or London, you can forget it. Going after property in those places means you’ll end up getting pushed out to areas that won’t bring you the slightest chance of success.
Of course, affordable urban real estate isn’t available in all frontier market countries — there are places in Africa where property in the central business districts is grossly overpriced, for example. But certainly in Cambodia, a high-quality piece of real estate isn’t going to cost you the earth.
Go where you’re treated best
There are many different frontier markets, and each one has a unique profile. From Ghana, the Ivory Coast, and Namibia in Africa to Bulgaria, Lithuania, and Latvia in Europe to Asia and the Middle East, there’s no shortage of places to choose from.
Obviously, there’s lots of homework to be done on any specific country that you’re looking at, but these six reasons will at least allow you to consider investing in a frontier market, diversifying your portfolio, and potentially earning higher returns than you could back home.
