Frontier Markets Renaissance – A New Pillar of Growth for the World’s Economy
Developed countries and the larger Emerging Markets have enjoyed a technology-based growth boom for the last thirty years (most particularly in the last fifteen years) as mobile phones turned into smart phones and Apps created a whole new ecosystem of mobile based growth in existing business lines but also in brand new business lines. China, Hong Kong, Taiwan and Korea in particular benefited from investment flows into the hardware and the enabling software that launched Apps and Super Apps that have largely driven investment returns. China specifically benefited from a freewheeling and aggressive entrepreneurial class that exploited the opportunities presented by rapidly growing GDP per capita, combined with a very large industrializing and urbanizing population.
While the subject of China will be the focus of another paper, the path of investments into China over the last twenty years does offer a taste of what we think is to come in the Frontier Emerging Market (“FEM”) countries in the next five years or more despite Xi Xingping’s heavy handed approach to regulatory oversight that started with the aborted float of Ant Financial in December of 2020.
The phrase often used to describe what is happening in FEM countries is “technological leapfrogging”, although it is also simply a catch up in technological opportunity. Everything we have been able to do in the developed world and the bigger more developed Emerging Market countries since the launch of the iPhone (and now, importantly a host of cheaper alternatives) is now rapidly becoming available to the poorer but very large and younger populations in the FEM countries. There are two simultaneous drivers to this development. First, network capabilities in the FEM countries are improving very quickly enabling smartphone usage. Second, smartphones have dropped in price precipitously and are now also available on payment plans and so are now affordable to even the poorer populations in the FEM countries. As a result an entire ecosystem is developing very quickly, faster indeed than it happened in the developed world because the wheel is not being re-invented. It is simply that mobile wallets, payments, ecommerce platforms, etc. that have developed over the last fifteen years in our world are now being applied to the FEM countries and the investment process is likely to be accelerated. In addition the opportunity is even bigger because the existing “old” infrastructure and way of doing business, which is slow and uncompetitive, is being disrupted by fast moving newcomers who understand the technology and the opportunities it brings and can capture large market shares even before the dinosaur incumbents know what is happening.
We believe that the investment inflows into many of the FEM countries in this technological ecosystem that we are already seeing (for example, Pakistan took in US$300 million of VC/PE funding in 2021 alone), will grow very fast and become a significant driver of accelerating growth for many FEM countries. This direct investment is healthy, the spin-off opportunities will be large, and poorer populations in the FEM world will get to benefit accordingly. This is win, win for all concerned.
We are going through a reset in valuations in the markets for many of these high growth, high multiple (or no multiple) companies and it is setting up an opportunity to invest in these business in the FEM markets at more appropriate and attractive valuations than have existed for some time. Indeed, the opportunity to take public the private companies that have been incubating for the last few years is presenting itself at attractive combinations of valuation and growth metrics.
Jonathan Binder is CIO at Consilium Investment Management