Investor Interest in Frontier Markets Remains Unchanged
For the past two years, the hedge fund industry has been expecting sophisticated investors to begin looking toward the Middle East specifically and Africa as well to get an inside edge on the hidden investment opportunities in these regions. These two large areas are made up of underdeveloped economies that some believed had long-term potential. Although both regions have fallen victim to a great deal of misgovernment and economic stagnation over much of the last century, many industry players saw attractive investment opportunities.
One of the main reasons why various fund managers anticipated such investor interest was that the major world equity and fixed-income markets were so puzzling. Unable to foresee where the markets were headed, many managers expected a new trend: investors researching regions they had previously overlooked or disregarded, specifically in the Middle East and North Africa. Sentiment overseas was similar. An article published by Hedgeweek stated: “…industry players and governmental agencies in the region are rubbing their hands with glee, as seasoned foreign investors, failing to find any kind of rhythm in developed markets, are seeing the Middle East as their new investment Mecca.”1
Although some investors recently interviewed by BHA have expressed an interest in both the Middle East and North Africa, research analysts have not noticed a significant increase in interest in these two regions. In fact, many investors are skeptical of such investments. In mid-July, a BHA analyst spoke with the managing director of an investment consulting firm located in Portsmouth, New Hampshire. In previous conversations, the firm had mentioned that it may have an interest in emerging and frontier market opportunities in lesser developed economies late in 2009 or early in 2010. However, the firm has now labeled such investments as “gambling” and stated that during such uncertain times, investing in volatile and under-researched regions was no longer an attractive opportunity for the firm.
The recent events at Dubai World, a government investment company that has been at the forefront of the region’s largest and most ambitious projects, will not help attract investor interest in the Middle East near term. When word spread through international media channels that Dubai World had requested a stand-still to repay some of its debt, traders and investors around the world began to fear that the impact of the global financial crisis had not been fully felt by the world’s economy, and particularly by the developing regions of the Middle East.2
Of the roughly 2000 hedge fund mandates compiled by BHA research analysts thus far this year, only 114 have specified an interest in the Middle East, 120 in Africa, and 40 in frontier markets. Although there is no arguing with the fact that there are strong growth drivers and investment opportunities in these regions, the vast majority of investors still prefer exposure to the traditional and more developed markets such as Europe and the U.S. It seems that it will take more time before the majority of investors to warm up to the idea of investing in the Middle East, Africa, and similar frontier markets.
1 Hedgeweek, “The New Investment Mecca,” October 11, 2008.
2 Telegraph, “Dubai default fears rock markets,” November 26, 2009.