The Frontier Markets’ Resurgence

As far as investing goes, the economic battlefronts of Europe, China, and the U.S. seem like the only concern.

Meanwhile, as if it could not care less about all that, Sierra Leone, the West African nation still shellshocked from years of truly horrific bloodshed, is building a stock market. Sitting on the corner of the edge of what they call the investing frontier—tiny, illiquid markets aspiring to graduate to emerging-market status and someday developed markets—the fledgling bourse in the capital of Freetown trades a single ticker for a total of four hours across two days every week. It wants to add another pair of listings and perhaps increase its hours as the economy grows a continent-leading 35 percent.

Southeast Asia’s Myanmar, long a rogue state that still ranks No. 180 of 183 nations in Transparency International’s corruption index, is suddenly open for business and maybe even democracy. Everyone, including Coca-Cola (KO) and Royal Dutch Shell (RDS.A), wants in. Dubbed Asia’s “next economic frontier” by the International Monetary Fund, the former Burma expects foreign direct investment to surge 40 percent this year to $4 billion. There’s a rush to build jetsetter-grade hotels in Rangoon.

Zambia just debuted a $750 million Eurobond. While the developed likes of Spain and Greece can’t find private takers for their debt, “around $15 billion of orders were apparently received for the [Zambian] issue,” analysts at Rand Merchant Bank wrote in a Sept. 14 report. “We expected the large interest due to investors eyeing riskier assets and the scarcity of Eurobonds in frontier Africa.”

And who better to bring it all back to your living room than BlackRock’s (BLK) iShares, which is launching what promises to be the go-to frontier markets exchange-traded fund. The mainstream-exotic experiment is essentially tantamount to McDonald’s (MCD) serving durian.

This boomlet defies traditional thinking: Frontier markets, it is widely believed, have no hope if emerging markets writ large are struggling—especially if China isn’t growing at full tilt. After all, who else would bid up all that newly mined Peruvian copper? And dictatorial Central Africa’s fossil fuels? Would there be much in the way of overflow labor demand in Vietnam if idled factory workers in Guangdong headed back to rural life? Recall how Asia’s late 1990s financial contagion hastened collapses in Russia and Latin America.

Of course, that largely forgotten emerging-market meltdown set the stage for the great decade of the BRICs—and their offshoots, the CIVETs and the N-11. The mid-to-late 2000s would have been a fine time to launch a ready-for-big-inflows frontier ETF. But for two years now, the U.S. has resumed an outperformance to emerging markets that it hadn’t enjoyed since the Clinton years.

There’s also confusion and impending dislocation in the space: In 2009, Argentina, once a darling among emerging-market investors, suffered a demotion to frontier status; perhaps the same ignominy ultimately awaits Greece, which is flirting with a downgrade from developed market to emerging market. Meanwhile, why hasn’t South Korea, home to such world-class brands as Samsung Electronics (005930) and Hyundai Motor (005380), yet been declared a developed market?

Cold-eyed investors might forgive these shortcomings in order to take advantage of frontier markets’ chief selling point: their offer of better diversification. Frontiersmen like Croatia and Bangladesh show a penchant for zagging when the rest of the planet is zigging in lockstep. In an increasingly risk-on/risk-off world, the MSCI Frontier Markets 100 Index correlated 65 percent with the movements of the Standard & Poor’s 500-stock index—well shy of emerging markets’ 84 percent correlation. Ten years ago emerging markets bought you a lot more diversification, when they correlated at just 57 percent.

Ten years ago was also the unlikely start to one of the great success stories in developing-markets history. That’s when a Marxist guerrilla group was at the gates of Bogota, firing shells into the Colombian capital. But the new government and rule of law ultimately prevailed, and foreign direct investment slowly returned—then exploded as a normalcy took hold. Colombia’s stock market has since surged twelvefold. Its Medellin(!)-listed companies are the envy of Latin American investment bankers, and it enjoys affordable debt terms thanks to its investment-grade credit rating. Within a short decade, Colombia has gone from near-failed state to frontier curiosity to thriving official emerging market.

So keep hope alive—and the market open (longer)—in Sierra Leone.

Farzad is a Bloomberg Businessweek contributor.

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Stung by Losses, Main Street Investors Fail to Notice Market's Rebound

Although the memory of Lehman Brothers’ 2008 collapse may be fading on Wall Street, the shock still lingers on Main Street—and may again be hurting ordinary investors. A new survey of individual investors is a reminder of just how much we are primal creatures that remember the pain of loss more than the joy of gains.

As my colleague Roben Farzad recently reminded us, the Standard & Poor’s 500-stock index is on a tear, rallying on rising corporate profits (including Apple’s (AAPL) earnings bonanza) and optimism about further help from the Federal Reserve. Since its nadir in March 2009, the S&P 500 has more than doubled and is now at 1,463, not that far from the all-time high of 1,526 it reached in September 2007.

But ask Main Street investors, and you find that the market isn’t all roses: Memories of the steep losses from 2008 and 2009 still haunt, causing them to underestimate the market’s performance.

Franklin Templeton (BEN) surveys individual investors annually, asking how they perceive the market’s performance in the previous year. In 2010, 66 percent of investors said the S&P had fallen in 2009, when it actually had gained 26.5 percent—in a year following a steep 37 percent plunge. In 2011, 48 percent of investors said the markets were down over the course of 2010, when the S&P had risen more than 15 percent. And data just released on Sept. 18 shows that 53 percent of investors think the S&P declined in 2011, when the index actually rose 2 percent.

It’s fair to wonder if investors who don’t know whether the S&P made or lost money the prior year are sufficiently attuned to the market to risk cash in it. However, Franklin Templeton’s survey is also a marketing exercise—the company is a major mutual fund seller that would like to help guide you into investing.

The S&P has gained more than 16 percent so far this year, but that’s no reason to to think investors have suddenly overcome their post-crash trauma. They have continued pulling out of equities, taking more than $66 billion (XLS) out of the U.S. stock market in 2012.

This fear of getting burned again—“loss aversion,” in financial psychology lingo—means that Main Street is being hit by a double whammy. Not only did individual investors take a beating when the market tanked, they’re not benefiting from its rebound, either.

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Markets Deliver Sobering Response to Greece's Election

Greece got a little breathing room. The rest of Europe didn’t. Yields on Spanish and Italian bonds soared to euro-era highs and European stocks slumped on June 18, the morning after Greek voters gave pro-bailout political parties enough support to form a parliamentary majority.

The message was clear: Even if Greece has stepped back from the brink of a euro-zone exit, that hasn’t slowed the spread of the financial crisis across the region. Investors are now demanding 7.14 percent returns on 10-year Spanish debt, above the 7 percent threshold that forced Greece, Ireland, and Portugal to seek bailouts. Italian 10-year debt is at 6.07 percent. Depositors have withdrawn tens of billions of euros from southern European banks in recent months.

Even as European Union leaders sent post-election signals that they’d compromise on Greek austerity measures to keep aid flowing to Athens, there was more scary news from Madrid. The Bank of Spain reported that bad loans reached 8.37 percent of total lending in April, an 18-year high. With the Spanish government piling up more debt in the aftermath of a €100 billion ($126 billion) bank rescue agreed this month, “The probability is rising that it will be asking for a bailout for the sovereign,” says Craig Veysey, head of fixed income at principal investment Management in London.

Sandra Holdsworth, a fund manager at the Kames Capital unit of Dutch insurance company Aegon, put it in even starker terms, saying Spain was “doomed” to a bailout. “Only a move, or even a sniff of a move, toward a fiscal union will encourage investors back into problem countries on a long-term horizon,” she wrote in an e-mailed note.

Fiscal union, simply put, means that Germany and other northern European countries with strong credit ratings would accept higher borrowing costs so that troubled southern European countries could borrow more. Berlin is having none of it. In interviews after the Greek vote, a representative of the German finance ministry reiterated the government’s opposition to jointly financed debt instruments, such as euro bonds and shorter-maturity euro bills.

It’s not even clear how much leeway the Germans are willing to grant Greece. A spokesman for European Council President Herman van Rompuy told Bloomberg Television that the European Union would consider “some adjustment” in the austerity measures required for Greece to receive additional aid—which is urgently needed, as the government could run out of money by July 20. The International Monetary Fund issued a statement that it was “ready to engage with the new government.”

But German Chancellor Angela Merkel left little wiggle room, telling reporters on Monday before a Group of 20 summit, “There can be no loosening on the reform steps.” A spokesman for Merkel said she told Antonis Samaras, leader of the pro-bailout New Democracy party, by phone after the party’s narrow election victory on June 17 that she hoped Athens would honor its commitments under the current aid agreement.

Even if Greece gets additional help, its future within the euro zone is far from assured. A softened bailout package might allow Greece to reduce annual interest payments by €5 billion while extending the repayment period, analysts at Morgan Stanley said in a June 18 report. But they predict that won’t be enough to return the country to solvency. Athens has failed to meet targets for tax collection, state asset sales, and public procurement that were required under the €240 billion bailout package it has received so far.

With the economy mired in recession and unemployment above 20 percent, Greece has little hope of generating more revenue or attracting investment. “The election has solved little and in our view is actually just another iteration toward the risks of a euro exit,” Harvinder Sian, senior rates strategist at RBS in London, told Bloomberg News. “The adjustment path is likely to remain too much for Greece to bear.”

With reporting by Emma Charlton, Simon Kennedy, and Lukanyo Mnyanda of Bloomberg News

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Rothschild’s Zurich Wealth Unit Targets Growth in ‘Old’ Markets

December 06, 2011, 4:41 AM EST By Giles Broom

Dec. 6 (Bloomberg) -- Rothschild Group’s wealth management unit in Zurich plans to meet targets for increasing assets by focusing on “old” markets in Europe as a crackdown on tax evasion crimps margins at Swiss private banks.

“The onshore markets are the fastest-growing markets in our bank,” said Thomas Pixner, head of private clients at Rothschild Wealth Management and Trust. “Everybody told us four years ago ‘forget about old markets; you can’t grow anymore,’ but we’ve created a lot of growth.”

Rothschild aims for “high single-digit” percentage annual growth in assets under management from the 11.8 billion euros ($15.9 billion) reported on March 31.

Rothschild, which traces its roots to family banking dynasty started by Mayer Amschel Rothschild in the 1760s, expects to win new clients as German entrepreneurs sell businesses over the next 10 years, said Riccardo Petrachi, who was hired this year from UBS AG to head the bank’s ultra-high- net-worth unit. The U.K. is another core market for Rothschild, which requires at least 1 million euros to open an account.

At least half of the Zurich wealth business is in cross- border accounts held by clients from countries including the U.K., Spain and France. Some customers have asked to transfer money to onshore accounts amid a global crackdown on tax evasion, said Pixner, who declined to comment on the profitability of different types of client.

Switzerland reached agreements with Germany and the U.K. this year over taxation of undeclared bank accounts. Revenue generated from the tax on investment and capital gains will go to the German and U.K. treasuries while client identities remain secret.

The Zurich-based firm competes in Switzerland with Banque Privee Edmond de Rothschild, the Geneva arm of the Rothschild family.

--Editors: Dylan Griffiths, Keith Campbell.

To contact the reporter on this story: Giles Broom in Geneva at gbroom@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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Lagarde Signals to IMF Staff More Power for Emerging Markets

July 01, 2011, 1:48 PM EDT By Timothy R. Homan and Sandrine Rastello

July 1 (Bloomberg) -- Christine Lagarde signaled that as the new head of the International Monetary Fund she will follow through on a promise to increase the stature of emerging-market nations at the global lender.

Lagarde, speaking to IMF staff in a video message, distanced herself from her previous role as French finance minister and indicated she would advance efforts to give more voting power to countries such as China and Brazil, according to a transcript obtained by Bloomberg News yesterday. Her five-year term begins on July 5.

“The transformations that have taken place in relation to governance for instance, must be pursued, must be continued, so that the fund does belong to its 187 members,” Lagarde, 55, said. “I am not the director of a particular group of countries. I am the director of the entire institution.”

In the course of an election-style campaign that took her to Brazil, China and the Middle East, Lagarde promised to boost the clout of developing nations at the IMF. In doing so she garnered endorsements from emerging economies as well as European Union countries and the U.S.

Lagarde was selected over Agustin Carstens, Mexico’s central bank governor. Emerging markets failed to rally around a candidate from among their ranks, after calling for an end to Europe’s six-decade lock on the position.

Candidate Lagarde

As a candidate, Lagarde also said she would push for quick implementation of a 2010 agreement that makes China the third- strongest voice in the organization and gives more say to nations such as South Korea. The 2010 agreement also weakens the influence of advanced European economies, which pledged to reduce the number of seats they hold on the IMF’s 24-person executive board.

“I am very concerned that we can enrich the institution as much as we can by using diversity as an asset,” Lagarde said, according to the transcript of the video message. “Gender, geography, academic background, culture -- all that diversity should actually be mixed so well that it produces this unbelievable intellectual talent that you together can produce.”

Women accounted for 45.5 percent of the IMF’s staff and 21.5 percent of its managerial jobs at the end of 2010, according to the organization’s annual diversity report, which also called the number of employees from emerging-market countries “unacceptably small.”

Lagarde is the first woman to head the IMF. She replaces Dominique Strauss-Kahn, who resigned after his arrest last month on charges that include attempted rape. He has pleaded not guilty.

“I know that recent events have not been particularly pleasant for any of you nor for the institution as a whole,” Lagarde said to IMF staff, without mentioning Strauss-Kahn by name.

--Editors: Christopher Wellisz, Kevin Costelloe

To contact the reporters on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net; Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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The Supercycle: A Longer Range View of Emerging Markets

By David Bogoslaw

(Corrects Morningstar data in seventh paragraph.)

Lots of investors say they adopt a long view, usually three to five years, when it comes to a particular investment. Some are taking that horizon even further—to 20 or 30 years, the "supercycle" that could last a generation or more. Some investment strategists say that industrialization and the expanding middle class in emerging economies from China to Brazil add up to a third industrial revolution, a prolonged period in which global economic growth shifts from developed nations in Europe and North America to Asia and South America.

Virginie Maisonneuve, head of global and international equities at Schroder Investment Management, uses shifting population growth, climate change, and the long-term outlook for commodities as a framework to understand the world and define the operating environment that companies must navigate. A commodities supercycle is based on the assumption that population growth, infrastructure buildout, and higher protein diets in emerging countries will support long-term demand and higher prices for industrial and agricultural commodities. Competition, demand, pricing, cost, and many other factors that affect how companies function will be touched by those themes, and in her portfolios are stocks that won't benefit or be especially hurt by any of those themes, she says.

Increasing urbanization and expectations for higher living standards as more people join the middle class underlie population growth forecasts for emerging economies, according to a 2010 special report on the supercycle by Standard Chartered Bank.

Although the belief that emerging markets will drive global economic growth in the future is fairly widely held, the supercycle isn't at the forefront of most investment managers' thinking. T. Rowe Price Group (TROW), which manages $32.4 billion in emerging market strategies, prefers to focus on how its assets will perform over the next three to five years, as opposed to the next 20 to 30 years at the heart of the supercycle thesis, says Jason White, a portfolio specialist at T. Rowe Price in Baltimore. Instead of grand themes such as climate change and shifting demographics, White says he considers which industries will likely benefit from emerging market trends. He likes infrastructure, wireless telecom, and banking.

For Schroder, a diversified asset manager in London that runs just under $300 billion in assets, the supercycle doesn't represent such a great stretch of the investing imagination. "The supercycle [describes] the role of large emerging market economies in the global economy," says Maisonneuve. "That is the evolution of the China theme I had for most of the past 25 years," with India and Brazil now joining China as key economic growth drivers for the world economy.

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