Would you ever consider putting your hard-earnedinvestment
dollars in a place like Nigeria or Kenya? It's a question that
strikes at the heart of an investor's risk tolerance.
But how you answer it may be a keyfactor in determining
whether you have what it takes to capture truly outsizegains in
thestock market .
While many people would stay up at night worrying about that
kind of an investment, others look at opportunities in far-flung
places and see vast and seemingly limitless potential.
These up-and-coming countries, or "frontier markets," tend to
be smaller and less developed thanemerging markets like China and
India. And while they don't get the same kind of media coverage
as these countries, the growth potential is staggering.
Many frontier markets are posting astonishing economic growth
of 7% to 14% peryear . As these economies grow and consumers
become wealthier, these marketswill present incredible
opportunities for investors.
Some of these nations have lagged behind the developed world
for centuries and have been unable to mount anything like the
fast rate of growth in other developing markets. Frontier markets
usually have a poor population willing to work to thrust itself
into a middle class, and, with luck, they also have access to a
deep cache of natural resources and an appetite for export
Just take a look at some of the results so far from two of my
favorite frontier markets.
In the last quarter of 2012, Nigeria'seconomy grew about 7%.
The growth story continued in Kenya. This East African nation's
forecastscall for 5.8% growth per year from now through 2020, and
then for growth to jump even higher, to 6.8% through
These high growth rates have led to solid market results so
far. The Nairobi Securities ExchangeIndex in Kenya returned 57%
in the past 12 months. The S&P 500, meanwhile, returned 18%.
During that same period, the Nigerian Stock Exchange All Share
Index advanced 56%.
Frontier-marketinvesting , which has been gaining interest, is
likely to continue to roll like a juggernaut. More investment
companies will create products like exchange-tradedfunds (
) that simplify access to these growing markets and help manage
risk. Brokerages will allow investors to participate in more
foreign exchanges, and more foreign companies will list their
securities in the United States.
Two things will fuel the trend toward the development of
frontier markets. The first is the development of a middle class,
a group of consumers no longer concerned with mere subsistence,
but rather with bringing in realdiscretionary income that can be
used to raise their standard of living. That is typically
followed by meaningful growth in high-profit services that create
This trend must be accompanied by a sustained, meaningful push
for democratically centered political stability. Foreign dollars
simply don't flow to countries where investors worry their
property will be confiscated by a corrupt junta.
Those two trends have to happen simultaneously. And the good
news is that they are happening and have been happening in many
frontier-market countries for years.
As that continues to take place, investors -- growing
increasingly tired of the tepid and sometimes negative returns
from mature markets -- are seeking greener pastures. And in the
digital age, they will leave no stone unturned in their search
for the market's next great growth story.
Surprisingly, the more isolated these fledgling economies are
from the debt-laden problems in Europe or the United States, the
better. The less exposure these countries have to a global event
like the recent financial crisis, the greater the
The ideal model, I think, is Nigeria. The African nation is
blessed with astoundingly rich natural resources, particularly
oil. And while for years the oil infrastructure there was a
target for disaffected and disenfranchised citizens who demanded
a greater share of the proceeds from the nation's oil, that
chapter has been closed and followed by a number of moves toward
The result has been nothing short of spectacular. Its economy
is expected to grow by 7.1% this year. And most of that growth
was derived outside of the booming oil sector. Economic reports,
in fact,bear out the notion that the Nigerian middle class is
beginning to spend to raise its standard of living.
My favorite exchange-tradedfund that gives investors exposure
to Nigeria is the
Market Vectors AfricaETF (
. The fund trades on the New York Stock Exchange and casts a wide
net over the African continent, with 25% invested in Nigeria. Its
holdings include some of Africa's largest banks, telecoms and
natural resource firms.
Of course, investing in an emerging fund like the Market
Vectors Africa ETF is risky. Political unrest or a crash in oil
prices are two very real possibilities that could lead to slow or
evennegative growth .
With that said, this fund offers easy exposure to a variety of
markets that have long been out of reach for the individual
investor. And with growth in the U.S. expected to be less than 2%
this year, you'd be wise to face your aversion to risk head-on
and invest just a modest portion of your portfolio in frontier