CFA Institute Magazine
by Jonathan Barnes
July/August 2013 issue
Chinese commodity investment and trade are reshaping frontier markets and emerging economies, but many investors are overlooking an even bigger story, according to Zambian-born economist Dambisa Moyo, author of Winner Take All: China’s Race for Resources and What It Means for the World. Although China is a major theme in the story, its contribution is less significant than the growth of domestic demand in these markets. Investors who focus only on the commodity aspect stand to miss out on opportunities for alpha generation. Moreover, a structural “schism” is forming between developed and emerging markets, with profound implications for investors.
In this interview with CFA Institute Magazine, Moyo, who recently spoke at the 66th CFA Institute Annual Conference in May, discusses
key developments and trends in frontier markets. As she explains, common misconceptions can lead investors into trouble, including the tendency to “conflate the idea of risk and uncertainty when they talk about emerging economies” and the misinformed notion that developing markets are highly illiquid. Moyo also highlights the danger of escalating conflicts over natural resources.
What story are you seeing in developing markets?
A lot of people are quite focused on private equity when thinking about emerging or frontier markets. But the most interesting story is really the public markets, because I think that’s where there is a blind spot for most investors. That’s where I think there is significant opportunity,
and we’ve already started to see that some of the savviest investors are really putting money to work in these markets. There is a lot of opportunity to invest and generate superior, uncorrelated returns in a broader global portfolio.
Many frontier markets—just looking at the macroeconomic theme—have a solid capital base in terms of debt and deficits, strong labor dynamics (in terms of a young population), and a really compelling story around productivity. Those are three key ingredients that drive economic growth: capital, labor, and productivity.
What I’m suggesting is that in the public markets, trading of equities and fixed income is rapidly increasing. I think the returns in the macro story are reasonably well known, but where I see real change in the thinking is around risk management and liquidity. Those are the two key things.