February 2014
Where the Frontier Lies
My last research trip to Asia included eight flights and nearly 50 grueling hours in the air. During
this time, I had the opportunity to ponder a question I am frequently asked, “How do you define
a frontier market?”
Just as we are all inclined to label and categorize things for simplification, investors do the same
with asset classes in attempts to simplify analysis. But these labels can sometimes mask important
realities behind a caricature. For many investors, the “frontier” and “emerging” labels, first and
foremost, provoke feelings of risk, unfamiliarity and perhaps a bit of exotic remoteness. But when
do these reservations obscure rather than simplify the investment decision? Are the labels then of
any real use?
Since I’ve spent the majority of my life living in both emerging and frontier markets, I would say
that using the broadly accepted measure of “per capita income” to distinguish between frontier
and emerging markets is probably too simplistic and not consistently applied. Let’s consider the
“frontier market” of Sri Lanka as an example. According to the World Bank, the nominal GDP per
capita in 2012 was US$2,923. This measure ranks Sri Lanka above the Philippines and India, both
of which are firmly in the more developed “emerging market” camp. The classification reality is
far more nuanced and a “one size fits all” measure is surely not appropriate.
When I think about definitions for emerging and frontier markets, I bear in mind many
qualitative issues before assigning a label. I remember many years ago in Africa, at a major border
post on a north-south artery road, officials had run out of the necessary forms. So, accordingly,
they would not let us cross because we could not submit the required documentation. That, to
me, qualifies for the frontier tag. And when a local consulate takes six weeks to issue a simple
travel visa, that country is probably eligible for the frontier label too. By contrast, Sri Lanka,
which was famously mired in civil war for more than two decades, now has a quick and efficient
online visa system. In Myanmar, officials welcome you in a crisp, unemotional and efficient
businesslike manner.
Another possible measure of a frontier market is food availability. I was astounded to learn on
a recent trip in an emerging Asian economy, which I would prefer not to name (lest I offend),
that several expatriates I met ordered vegetables from abroad on a regular basis because they
found too many concerns with the quality and safety of the local produce. This was surprising
to me since I had lived in Vietnam for four years where we enjoyed delicious local produce with
absolute confidence. Could quality of food and produce be a factor in comparing emerging versus
frontier markets?
As my trip drew to a close, I concluded that a frontier is a place where local, political, and social
forces inhibit positive changes. This can be seen in past decades in so many frontier countries,
it is often a case of two steps forward and two steps back. By contrast, in Asia one can see solid
evidence that these smaller economies are moving forward, although certainly not without some
setbacks along the way. It is this positive momentum that we as investors like to see in order to
gain a sense that there are probable, rather than just possible, opportunities for improvement
over the medium and longer term. Here at Matthews Asia, we focus on the fundamental prospects
of individual companies. As such, the various definitions or classifications of different markets are
basically irrelevant as we hunt these fertile economies in search of worthy investment candidates.
Our research travels can be exhausting but constantly interesting and fruitful. They are critical
to our understanding of the investment opportunities that may exist. In this process, we tend
to ignore the various market labels and work to decipher the underlying realities so that we can
uncover what is beneath the exotic mask of Asia’s frontier and emerging markets. Robert Harvey, CFA
Portfolio Manager
Matthews International Capital Management, LLC
matthewsasia.com
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