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Charlemagne Capital - Frontier Emerging Markets: The Reform Story

Tuesday, July 18, 2017

Charlemagne Capital - Frontier Emerging Markets: The Reform Story


In this paper we will explore these inherent prejudices and biases and try to show that in a diversified portfolio, the risks of Frontier Emerging market investing are actually lower than other equity asset classes and the potential returns greater.


There are currently 195 countries in the world of which approximately  51 are classified by the major equity index providers as Developed or Emerging markets. The rest of the countries are, by exclusion, Frontier. This universe includes a very wide range of countries at varying stages of political, economic and stock market development.  This 144 country Frontier grouping is where we predominantly look for investment opportunities. The single key attribute that we are looking for before considering the companies in any country as an investment opportunity is reform. In our near 30 year history of emerging market investing, we have found a one to one correlation between political and economic reform, and economic growth. Conversely we look to avoid completely countries that are experiencing a negative reform process as this will always lead to serious economic issues which most of the time will overpower the ability of even the most competent companies to grow.


There are many recent examples of countries that have experienced very strong economic growth due to firstly a change of political regime, and secondly the subsequent implementation of reformist, market orientated economic policies. The end of the communist regimes in Eastern Europe was certainly a major reform catalyst, however we have seen massive differences in the political and economic regimes to subsequently emerge from the region. For example Romania struggled under a burden of political corruption and cronyism for the first 20 years of its post-communist life, until an anti-corruption and economic reformist administration turned it into the fastest growing country in the whole of Europe over the last four years. Pakistan emerged from a military dictatorship in 2013 and the new reformist and extremely business orientated government has, through the implementation of sensible economic policies, turned the country into one of the fastest growing in Asia. Argentina has had a similar transformation following the new Macri government coming to power in 2015.

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