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In the end, the team concluded that while emerging markets were expected to continue to do well in the coming years, replicating their outperformance of the past quarter century would be difficult. Instead, they suggested investors should look to new geographies — the frontier markets — arguing that these markets had many of the same characteristics that emerging markets did when they were first identified as an investable group back in 1988. Fast forward nearly two years and the frontier market story has matured with frontier equity markets outperforming both their larger emerging market peers and developed markets, accompanied by strong fund inflows with assets under management nearly doubling in that time period. As investor interest continues to increase, we thought it was timely to revisit the original arguments as to why frontier markets would be the new generation of emerging markets. The long-term catch-up and convergence story for frontier markets remains intact. These countries tend to be less economically developed than their emerging peers, have a higher degree of political risk, and despite recent performance, their stock markets are smaller than they should be given the size of the population and potential economic output of the countries in which they are based. In this report, there are three sets of drivers that have been identified as underpinning the frontier markets story: economic, financial and business. Economic growth in frontier markets is being helped by favorable demographics and rising productivity while foreign direct investment, an improvement in institutional quality, and debt levels which have not been inflated are helping to drive expansion. As investor interest grows, frontier financial markets’ depth and breadth should continue to converge towards emerging market levels. Opportunities for corporates tend to be greater in frontier markets due to lower penetration levels of a range of goods and services, the rising demand for infrastructure and the significant barriers to entry in many industries. But of course an investment in frontier markets comes with substantially higher risks than an investment in developed or emerging markets. Political risk in particular has been a defining characteristic of frontier markets and the report takes a close look at how shifting and more volatile public opinion — Vox Populi — poses a new and powerful risk to the investment environment. Finally, the report revisits two major economies — Nigeria and Vietnam — which represent the best of what the frontier markets have to offer but also face what we believe are fairly typical challenges for the asset class.

In the end, the team concluded that while emerging markets were expected to continue to do well in the coming years, replicating their outperformance of the past quarter century would be difficult. Instead, they suggested investors should look to new geographies &mdash; the frontier markets &mdash; arguing that these markets had many of the same characteristics that emerging markets did when they were first identified as an investable group back in 1988.
Fast forward nearly two years and the frontier market story has matured with frontier equity markets outperforming both their larger emerging market peers and developed markets, accompanied by strong fund inflows with assets under management nearly doubling in that time period. As investor interest continues to increase, we thought it was timely to revisit the original arguments as to why frontier markets would be the new generation of emerging markets.
The long-term catch-up and convergence story for frontier markets remains intact. These countries tend to be less economically developed than their emerging peers, have a higher degree of political risk, and despite recent performance, their stock markets are smaller than they should be given the size of the population and potential economic output of the countries in which they are based.
In this report, there are three sets of drivers that have been identified as underpinning the frontier markets story: economic, financial and business. Economic growth in frontier markets is being helped by favorable demographics and rising productivity while foreign direct investment, an improvement in institutional quality, and debt levels which have not been inflated are helping to drive expansion. As investor interest grows, frontier financial markets&rsquo; depth and breadth should continue to converge towards emerging market levels. Opportunities for corporates tend to be greater in frontier markets due to lower penetration levels of a range of goods and services, the rising demand for infrastructure and the significant barriers to entry in many industries.
But of course an investment in frontier markets comes with substantially higher risks than an investment in developed or emerging markets. Political risk in particular has been a defining characteristic of frontier markets and the report takes a close look at how shifting and more volatile public opinion &mdash; Vox Populi &mdash; poses a new and powerful risk to the investment environment. Finally, the report revisits two major economies &mdash; Nigeria and Vietnam &mdash; which represent the best of what the frontier markets have to offer but also face what we believe are fairly typical challenges for the asset class.

On the Right Track to Be Tomorrow's Emerging Markets

As both markets and economies started to recover from the Great Financial Crisis back in late 2011, Citi’s Equity Strategy team decided to take an in-depth look at the performance of emerging markets. In a Citi GPS report titled Call of the Frontier: The Search for a New Generation of Emerging Markets, the team focused on the characteristics that drove the 24-year outperformance of emerging overdeveloped markets and questioned whether it was possible for this asset class to repeat the consistent growth rate that it achieved in the past few decades (from 1988 to 2013, emerging markets grew at a compound annual growth rate of 12.1%).

Call of the Frontier Revisited

Ebrahim Rahbari

Tina M Fordham

Edward L Morse

Seth M Kleinman

Tiia Lehto

Michael Saunders

Jan Techau

Tina Fordham, Citi's Global Chief Political Analyst, has already warned that the latest events may mark a turning point in the political landscape as rising geopolitical tensions and shifting socio-political trends converge in an increasingly interconnected world. In this publication, Tina and co-author Jan Techau, Director of European think tank Carnegie Europe, explain how weakened global elites and fast evolving social trends have created an increasingly unstable political environment that threatens to bring unprecedented commercial challenges on a global scale. There is an increasing likelihood that new transmission mechanisms are evolving that could lead to political risk having an impact on economic forecasting models, changing the way that companies do business and driving a secular, or even structural, increase in risk premia in financial markets. Until now, financial markets have taken a relatively sanguine view of political events, treating them as regionalized and idiosyncratic. However political risk can quickly and meaningfully alter return expectations across asset markets where transmission mechanisms are established in economic channels. Political events and social trends are becoming increasingly interconnected; links can easily be made between tensions in the Middle East, terrorist attacks around the world and the migration crisis, between migration and European politics, and between tensions in Europe and politics in the U.K. With shifting political sands in the U.S. creating a vacuum in global governance, there is an increasing risk that a negative feedback loop is forming as previously comfortable sectors of society feel increasingly vulnerable and less financially secure. Hitherto, geopolitical events have largely been addressed through diplomatic channels but, as Tina and Jan point out, diplomacy is ineffective against a rising sentiment of injustice and inequality among increasingly diverse social groupings. The result is an increased incidence, on one side, of non-diplomatic measures such as sanctions, protectionism, aggressive regulation, border disputes and armed conflict, and on the other of anti-establishment sentiment, protests, violent demonstration and terrorist activity. All of these can deliver a direct economic cost that could be changing the business and investment landscape. There are several channels through which political events could become a driver of financial markets: Sharply higher or lower commodity prices are surely one. Sanctions are another as they will normally have an impact on the economic prospects of an affected country. There may be an offset to this; when exports from a sanctioned country fall, there is likely to be a substitution effect in another producing economy. Overall, however, a combination of more sanctions and increased protectionism is likely to result in lower levels of trade and this, with reduced comparative advantages in production, is likely to weigh on global growth and commerce. One of the main factors insulating markets from geopolitical risk has been abundant liquidity provision by central banks. As the Fed begins to raise rates, that support will begin to wane. For most of 2015 markets were transfixed by two main drivers; Fed policy and China's economic outlook. 2016 and beyond may prove to be the era in which politics rather than economics comes to the fore. To address this, we have brought together leading experts on geopolitical and socio-economic risks (Tina Fordham and Jan Techau) energy (Ed Morse) and economics (Ebrahim Rahbari) who believe he contours of a new post-Cold War, post-Lehman paradigm are emerging. If they are right, or even partly right, and these changes are structural, we may be entering a new paradigm, where policy-makers, including Central Banks, have less power to mitigate risks. This suggests a whole host of previously assured assumptions could be in the process of becoming obsolete. Authors: Tina M Fordham,Jan Techau,Ebrahim Rahbari,Seth M Kleinman,Tiia Lehto,Edward L Morse,Michael Saunders,Authors: Authors: Tina M Fordham,Jan Techau,Ebrahim Rahbari,Seth M Kleinman,Tiia Lehto,Edward L Morse,Michael Saunders,Authors: Authors: Tina M Fordham,Jan Techau,Ebrahim Rahbari,Seth M Kleinman,Tiia Lehto,Edward L Morse,Michael Saunders,

Tina Fordham, Citi's Global Chief Political Analyst, has already warned that the latest events may mark a turning point in the political landscape as rising geopolitical tensions and shifting socio-political trends converge in an increasingly interconnected world. In this publication, Tina and co-author Jan Techau, Director of European think tank Carnegie Europe, explain how weakened global elites and fast evolving social trends have created an increasingly unstable political environment that threatens to bring unprecedented commercial challenges on a global scale. There is an increasing likelihood that new transmission mechanisms are evolving that could lead to political risk having an impact on economic forecasting models, changing the way that companies do business and driving a secular, or even structural, increase in risk premia in financial markets. Until now, financial markets have taken a relatively sanguine view of political events, treating them as regionalized and idiosyncratic. However political risk can quickly and meaningfully alter return expectations across asset markets where transmission mechanisms are established in economic channels. Political events and social trends are becoming increasingly interconnected; links can easily be made between tensions in the Middle East, terrorist attacks around the world and the migration crisis, between migration and European politics, and between tensions in Europe and politics in the U.K. With shifting political sands in the U.S. creating a vacuum in global governance, there is an increasing risk that a negative feedback loop is forming as previously comfortable sectors of society feel increasingly vulnerable and less financially secure. <img class=" wp-image-1150 aligncenter" src="https://www.citivelocity.com/citigps/wp-content/uploads/2017/12/GPSReport_5813_InfoInsight.png" alt="" width="345" height="324" /> &nbsp; Hitherto, geopolitical events have largely been addressed through diplomatic channels but, as Tina and Jan point out, diplomacy is ineffective against a rising sentiment of injustice and inequality among increasingly diverse social groupings. The result is an increased incidence, on one side, of non-diplomatic measures such as sanctions, protectionism, aggressive regulation, border disputes and armed conflict, and on the other of anti-establishment sentiment, protests, violent demonstration and terrorist activity. All of these can deliver a direct economic cost that could be changing the business and investment landscape. There are several channels through which political events could become a driver of financial markets: Sharply higher or lower commodity prices are surely one. Sanctions are another as they will normally have an impact on the economic prospects of an affected country. There may be an offset to this; when exports from a sanctioned country fall, there is likely to be a substitution effect in another producing economy. Overall, however, a combination of more sanctions and increased protectionism is likely to result in lower levels of trade and this, with reduced comparative advantages in production, is likely to weigh on global growth and commerce. One of the main factors insulating markets from geopolitical risk has been abundant liquidity provision by central banks. As the Fed begins to raise rates, that support will begin to wane. For most of 2015 markets were transfixed by two main drivers; Fed policy and China's economic outlook. 2016 and beyond may prove to be the era in which politics rather than economics comes to the fore. To address this, we have brought together leading experts on geopolitical and socio-economic risks (Tina Fordham and Jan Techau) energy (Ed Morse) and economics (Ebrahim Rahbari) who believe he contours of a new post-Cold War, post-Lehman paradigm are emerging. If they are right, or even partly right, and these changes are structural, we may be entering a new paradigm, where policy-makers, including Central Banks, have less power to mitigate risks. This suggests a whole host of previously assured assumptions could be in the process of becoming obsolete. Authors: Tina M Fordham,Jan Techau,Ebrahim Rahbari,Seth M Kleinman,Tiia Lehto,Edward L Morse,Michael Saunders,Authors: Authors: Tina M Fordham,Jan Techau,Ebrahim Rahbari,Seth M Kleinman,Tiia Lehto,Edward L Morse,Michael Saunders,Authors: Authors: Tina M Fordham,Jan Techau,Ebrahim Rahbari,Seth M Kleinman,Tiia Lehto,Edward L Morse,Michael Saunders,

The New Convergence Between Geopolitical and Vox Populi Risks, and Why It Matters

2016 has begun, as 2015 ended, amid a significant worsening of the global political climate and along with that, considerable volatility in financial markets. Investors and businesses are increasingly aware of the need to understand the drivers and the implications of a greater level of event risk exacerbated by shifting social patterns.

Global Political Risk

While the group of markets we call emerging markets (EMs) are expected to continue to do well in the coming years, we believe that replicating their outperformance of the past quarter century will be difficult. The EM's have evolved, both in terms of their size and the pace of their growth, versus the world as a whole. Greater political stability, improvements in infrastructure, a growth in consumerism, and a rapid expansion in trade have driven dramatic changes in the fabric of emerging market countries. As EMs have matured and become less risky places, the expected returns form investing in them have almost certainly converged downward. Replicating the higher returns of EMs past may require investors to look to new geographies: the Frontier Markets. These markets have relatively small/illiquid equity markets compared with emerging markets, and tend to be less economically developed. An essential element of our argument is that frontier markets are smaller than they should be given the size of population and potential economic output of the country in which they are based. In this report, we focus on 15 countries in particular - our "Frontier-15" - which have the potential to generate the kind of returns for equity investors over the coming decades that the emerging markets themselves have produced over the past quarter-century. These are Argentina, Bangladesh, Egypt, Ghana, Iraq, Kazakhstan, Kenya, Mongolia, Nigeria, Pakistan, Romania, Sri Lanka, Ukraine, Venezuela, and Vietnam. In addition, we look in more detail at the economic outlook for two of the economies that rank among the fastest long-term growers within the Global Growth Generators (3G) growth framework: Nigeria and Vietnam. Despite headwinds for both countries, the opportunity for each economy is undeniable given the presence of key ingredients to economic growth: large, young populations; low per capita incomes; greater openness to trade; in the case of Nigeria, a large natural resource base, in the case of Vietnam, fast-growing, industrializing neighbors. There are plenty of near-term challenges to both economic and financial market success in these countries. Developing economies benefit from global trade and capital flows, and as such will not be immune to economic instability stemming from the Eurozone's troubles. Institutions tend to be weak, and policies uncertain. Looking beyond the near term, however, we believe that frontier markets will achieve some degree of convergence with both emerging and developed markets. A range of economic and financial factors, as well as features of the business environment should support this. Over time, the frontier markets are likely to adopt many of the changes implemented by their more successful peers - the emerging markets - while doing their best to avoid their own more egregious mistakes of the past. Given their starting point, even modest improvements can yield significant results. Such has been the story with emerging markets, and indeed the developed markets before them. The frontier beckons.

While the group of markets we call emerging markets (EMs) are expected to continue to do well in the coming years, we believe that replicating their outperformance of the past quarter century will be difficult. The EM's have evolved, both in terms of their size and the pace of their growth, versus the world as a whole. Greater political stability, improvements in infrastructure, a growth in consumerism, and a rapid expansion in trade have driven dramatic changes in the fabric of emerging market countries. As EMs have matured and become less risky places, the expected returns form investing in them have almost certainly converged downward.
Replicating the higher returns of EMs past may require investors to look to new geographies: the Frontier Markets. These markets have relatively small/illiquid equity markets compared with emerging markets, and tend to be less economically developed. An essential element of our argument is that frontier markets are smaller than they should be given the size of population and potential economic output of the country in which they are based.
In this report, we focus on 15 countries in particular - our "Frontier-15" - which have the potential to generate the kind of returns for equity investors over the coming decades that the emerging markets themselves have produced over the past quarter-century. These are Argentina, Bangladesh, Egypt, Ghana, Iraq, Kazakhstan, Kenya, Mongolia, Nigeria, Pakistan, Romania, Sri Lanka, Ukraine, Venezuela, and Vietnam.
In addition, we look in more detail at the economic outlook for two of the economies that rank among the fastest long-term growers within the Global Growth Generators (3G) growth framework: Nigeria and Vietnam. Despite headwinds for both countries, the opportunity for each economy is undeniable given the presence of key ingredients to economic growth: large, young populations; low per capita incomes; greater openness to trade; in the case of Nigeria, a large natural resource base, in the case of Vietnam, fast-growing, industrializing neighbors.
There are plenty of near-term challenges to both economic and financial market success in these countries. Developing economies benefit from global trade and capital flows, and as such will not be immune to economic instability stemming from the Eurozone's troubles. Institutions tend to be weak, and policies uncertain. Looking beyond the near term, however, we believe that frontier markets will achieve some degree of convergence with both emerging and developed markets. A range of economic and financial factors, as well as features of the business environment should support this. Over time, the frontier markets are likely to adopt many of the changes implemented by their more successful peers - the emerging markets - while doing their best to avoid their own more egregious mistakes of the past. Given their starting point, even modest improvements can yield significant results. Such has been the story with emerging markets, and indeed the developed markets before them. The frontier beckons.

The search for a new generation of emerging markets

Nothing ventured, nothing gained. Such a maxim reflects one of the basic tenets of financial markets. Investors demand a higher expected return for investing in projects of greater uncertainty. Over the past 24 years - and especially over the past decade - investing in emerging markets have certainly delivered those higher returns. A $1,000 investment in the MSCI Emerging Markets index on the day it was launched in 1988 would be worth $17,553 today, including reinvested dividends, a compound annual return of 12.7%. This compares with the same investment in the MSCI World index, which today would be worth just $4,940, a compound annual return of 6.9%.

Call of the Frontier

In this video, we focus on 15 countries in particular – our “Frontier-15” – which have the potential to generate the kind of returns for equity investors over the coming decades that the emerging markets themselves have produced over the past quarter-century. These are Argentina, Bangladesh, Egypt, Ghana, Iraq, Kazakhstan, Kenya, Mongolia, Nigeria, Pakistan, Romania, Sri Lanka, Ukraine, Venezuela, and Vietnam.

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Call of the Frontier

Call of the Frontier Revisited

Global Political Risk

Call of the Frontier

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