Exploring the Smaller Emerging Markets

Mark Mobius, Ph.D.
Executive Chairman
Templeton Asset Management Ltd.

At Templeton, we are finding companies in many small and relatively unknown markets that we believe are quite attractive from an investment standpoint and may add greater diversification to a portfolio. We term these lesser-known markets "frontier markets,"as they are in the initial stages of becoming the emerging markets of tomorrow.

Frontier markets have been largely ignored by most emerging market investors. They tend to be illiquid, poorly researched and relatively difficult to enter because of foreign exchange controls and other factors. Frontier markets include many countries in Africa, the Middle East, Central Asia and parts of eastern Europe. The Middle East, for example, is of great interest to us, and we believe its potential for economic growth and development remains considerable, especially if the current trend of implementing political and economic reforms remains on course. We are also excited about Africa, where in addition to South Africa, regional economies are beginning to look attractive. In Asia, we are finding opportunities in Vietnam and Sri Lanka.

Frontier markets usually exhibit a low correlation with emerging markets as well as with other global markets, and they are distinguished by several characteristics. Frontier markets are generally more isolated from activity in other markets. They also have tended to show faster growth than most other markets since they are much smaller and their growth is measured from a lower base.

Finally, they offer the opportunity to invest in sectors and industries that may be otherwise difficult to enter in developed countries or even in larger emerging markets. For example, we have found it comparatively difficult to invest in attractively valued consumer stocks in major emerging markets, as very often good consumer companies have already been acquired by multinationals. However, in frontier markets, we have gained access to many attractive consumer stocks, usually of small companies. Therefore, the sector breakdown in a frontier markets portfolio is likely to be quite different from an emerging markets portfolio.

At Templeton, we are excited about the frontier markets’ potential. These countries offer strong growth potential and numerous opportunities for investors wishing to further diversify their holdings, in our view. Frontier markets could potentially offer extra return for the extra risk one must assume. In addition, frontier markets are often quite cheap-much cheaper than emerging markets.

Of course, the nature of frontier markets is such that they experience a great deal of volatility. Often they are more volatile and less liquid than emerging markets. Therefore, we believe that frontier markets are worth considering for investors with a long-term view and the fortitude to cope with a degree of volatility in the short term.

Please click here for more information on the FTIF – Templeton Frontier Markets Fund.