Of all the yarns spun about American history, perhaps my favorite folk stories come from the American Frontier. The sheer brawn and bravery of early pioneers is unparalleled in our history.
From Daniel Boone battling Indians while trailblazing through the Cumberland Gap, to Davey Crockett going down in a hail of gunfire at the Alamo, the American frontier is filled with tales of bold risks and derring-do.
Perhaps my favorite story from the frontier was that of fur trapper Hugh Glass. In 1822, Glass was on a trapping expedition near Great River, South Dakota when he came across a mother grizzly bear and her cubs. Before he could steady his rifle the bear lunged at him and began tearing him to pieces — tossing the flesh to her cubs as she did.
Glass was somehow able to pull his hunting knife out and, after a bloody fracas, he killed the bear. But he was badly injured, so much so that his trapping partners draped him in bear skin and left him — assuming he was as good as dead.
He wasn’t…
When Glass awoke, he found himself stranded without any weapons or food. His leg was broken and the bear attack had left him covered in wounds so grievous that his ribs were exposed. In a fit of unbelievable strength and bravery, Hugh Glass set his leg and began making his way to the nearest American settlement — 200 miles away.
What happened next is not for the squeamish.
As he ambled along, Glass stopped at a rotting log and laid his bloody back upon it, allowing the maggots within to clean his wounds.
In a fit of divine providence, Glass came across some compassionate Indians who sewed the bear skin to his back to protect his gaping wounds. They provided him with a couple of weapons and he continued his lonely, painful journey all the way to Fort Kiowa, where he was nurtured back to health by the American settlers there.
After recovering from the horrific ordeal, he literally got back on the horse and went in search of new trapping routes…
I think it’s safe to say they sure don’t make ’em like that anymore…
“Badass Hugh Glass”
It is but one example of brave pioneers fighting against all odds to create new communities, form new states, and introduce new markets, which ushered in a long period of success for the United States. The sky was the limit in terms of the riches and opportunities this new land provided for those bold souls willing to take a chance.
Despite the dangers, these American folk heroes headed out West in droves in order to make their fortunes in land speculation, the fur trade, and the gold rush.
Which brings me to my investing topic for today — frontier markets. Perhaps the most appropriate quote explaining why these emerging and burgeoning markets are looking attractive today is from frontiersman and entertainer Will Rogers…
“Even if you’re on the right track, you’ll get run over if you just sit there.”
That’s how I feel about the U.S. stock market right now. While we’re riding all-time highs, it may seem like we’re on the right track. However, I have the creeping feeling that a distant train is barreling down the tracks, ready to steamroll investors who haven’t thought to start looking elsewhere.
There is already a caravan of pioneering investors going into uncharted territories, seeking to find bigger and better yields in new frontier markets around the globe. So, grab your coon-skin cap and let’s take a trip around the world to see where we can stake a claim…
When I look at the S&P 500 — which has touched record highs in the past few days — I don’t see too much upside. I, for one, do not like buying stocks at all-time highs; I’m a sucker for a bargain. And while the U.S. market may have a few nuggets left, it sure looks to me like the six-year gold rush in U.S. equities is about over.
In fact, money is already flooding out of U.S. stocks. Last month we saw over $35 billion pulled out of U.S. equity mutual funds and ETFs — the most since the crash of 2008. Investors are cashing in their profits and looking elsewhere for serious upside potential.
A lot of that money has been flowing towards these new “frontier markets.” These are markets that are not quite ready for emerging market status, but are showing signs of successful development.
These are places that can deliver massive profits if all goes well…
So which countries qualify for “frontier” status?
The MSCI Frontier Index includes the following countries: Argentina, Bahrain, Bangladesh, Bulgaria, Croatia, Estonia, Jordan, Kenya, Kuwait, Lebanon, Lithuania, Kazakhstan, Mauritius, Morocco, Nigeria, Oman, Pakistan, Romania, Serbia, Slovenia, Sri Lanka, Tunisia, Ukraine, and Vietnam.
Now, before you shriek at the idea of putting your hard earned money into terrorist havens (Pakistan) and war zones (Ukraine), hear me out…
Individually, the countries on the MSCI Frontier Index have been delivering some impressive results:
- Kenya, Nigeria, and Kazakhstan are all in the top 10 fastest growing economies in the world.
- Pakistan is poised for expanded growth after a massive $46 billion infrastructure deal with China. The chairman of the Pakistan-China Institute has called the package a “game changer.”
- Argentina’s Buenos Aires Stock Exchange is up a whopping 46.5% so far this year, making it the best stock index in all of Latin America.
- Even Romania’s Bucharest Stock exchange has quietly returned 23.04% over the past year.
While there are certainly serious risks associated with investing in any type of emerging market, like political unrest, corruption, disease, and a lack of liquidity in the market, frontier markets have been rather resilient.
By and large, while it may seem counter-intuitive, frontier markets overall have been less volatile than their big brothers in the emerging market space. According to a recent report by Morningstar, the MSCI Frontier Index has been less volatile than both the MSCI Emerging Markets Index (which tracks larger emerging market countries like China, Brazil, and India) — and the MSCI EAFE Index (which covers developed economies outside of the U.S. and Canada)
Frontier markets also have crucial time and demographic factors on their side. As Silk Invest points out:
Over the next two decades the world will see the total number of consumers more than double. Most members of this new middle class will arise from the frontier economies. In 2050 more than one third of the world’s population will probably live in the frontier economies. This number is expected to reach just under half of the global population within a century.
Those are friendly trends.
But I certainly wouldn’t start cherry picking companies in these locations. Not only is it practically impossible for most individual investors, but it’s also incredibly risky. If you want broad exposure to frontier markets, you are better off with a low-cost ETF…
The pure play here is the iShares MSCI Frontier 100 (NYSE: FM) — which is the largest of frontier market ETFs. It tracks the investment results of the MSCI Frontier Index I mentioned above. It is currently sporting some attractive stats, like a P/E ratio of 11 (almost half the S&P 500) and a generous 3% dividend yield.
Here’s the country allocation:
- Kuwait 24.2%
- Argentina 14.4%
- Nigeria 12.6%
- Pakistan 10.4%
- Kenya 8%
- Oman 5.9%
- Morocco 5.5%
- Kazakhstan 4%
- Vietnam 3.7%
- Romania 3.5%
- Bangladesh 3.0%
- Sri Lanka 2.5%.
A word of warning: treat these types of plays as portfolio diversification. Like settlers in the American frontier battled Indians, bears, and dysentery, today’s frontier markets have their own share of dangers and uncertainly: be it Boko Haram terrorist attacks in Nigeria and Kenya, runaway inflation in Argentina, or Russian aggression in Ukraine.
You never know what can happen, which is why it pays to be diversified. But frontier markets have major upside potential.
And if Hugh Glass could kill a grizzly bear with a hunting knife, you can easily handle a bear market with a simple hedge.
Godspeed,
Jimmy Mengel
Jimmy is a managing editor for Outsider Club and the Investment Director of the personal finance advisory The Crow’s Nest. You may also know him as the architect behind the wildly popular finance and investing website Wealth Wire, where he’s brought readers the stories behind the mainstream financial news each and every day. For more on Jimmy, check out his editor’s page.
