Frontier markets are where the long-term growth is – ignore them at your peril

Arsenal and Rwanda sponsorship deal © Getty Images
Rwanda’s £30m deal with Arsenal could be money well spent

On Tuesday the BBC’s John Humphrys interviewed Clare Akamanzi, head of the Rwanda Development Board, about her plan to advertise her country’s tourism industry on the shirts of Arsenal football players for three years for an undisclosed sum (Humphrys suggested £30m; she said much less).

In it, he referred to the plan as “incredibly bizarre” and “positively eccentric”. He dismissed the idea that Rwanda tourism was worth the spending, with the suggestion the country was “making inroads to poverty” more as result of the aid it gets than the money it makes (by the way, that’s $50m a year from gorilla viewing permits, even before the adverts kick off).

Akamanzi was amazed. She said Rwanda has cut its dependency on aid hugely (down to 17% of the budget); that per capita income had tripled in 15 years; and that policymakers thought hard about “good choices” to “strive for self-reliance”. It is a country capable of making good decisions, she said, adding that Mr Humphrys’ questions suggested he was ill-intentioned, ill-informed or biased.

If the Swedish statistician Hans Rosling were still with us, I suspect he would have called it something else. In his last book, Factfulness, he outlined ten human instincts that stop us understanding the truth. The relevant one here is the “destiny instinct”, the idea that things “are as they are for ineluctable, inescapable reasons: they have always been this way and will never change”.

Africa’s economic miracle

Western views about Africa are a classic manifestation of this. We tend to think of it as one big disaster area, destined to be poor and corrupt forever. Of course, it is not. Tunisia, Algeria, Morocco, Libya and Egypt now have life expectancies matching Sweden’s in 1970.

As Rosling said, “if you look for poor people in Africa you will find them”, but sub-Saharan African isn’t doing badly either. Since countries gained their independence 60-odd years ago (not long, is it?), they’ve expanded their infrastructure “at the same steady speed” as European countries did when going through their own economic miracles.

At the same time, each has reduced its child mortality rate faster than Sweden did, Rosling said. In Rwanda that has meant bringing it down from 114.6 deaths per 1,000 live births before the age of five in 2005, to 38.5 in 2016. That number is still horribly high but if you think of child mortality data as measuring the “quality” of a society (and you should), its speed of travel also represents astonishing progress.

Let’s not forget that there was extreme poverty in much of Europe 90-odd years ago and pretty intense poverty in many places only 40 years ago. (I have memories of primary school in Galway I can hardly make myself believe now.) Just 50 years ago China, India and South Korea, our latest miracles, were in most ways all far behind where sub-Saharan Africa is today.

The key point is that the destiny instinct makes it hard for us to grasp the extent of the change around us. Would you have guessed that Rwanda has a literacy rate of nearly 80% (89% of girls attend primary school) and that Kigali is one of the cleanest cities in the world, for example? When we see it where we don’t expect it, we think of it as temporary — in much of Africa’s case as “an improbable stroke of good fortune”. Do a web search for “Rwanda, economic mirage” and you will see this in action.

Ignore frontier markets at your peril

All this matters. That’s partly because it can make for dismal radio interviews but, for investors, it means you may not put your money where it will get the best long-term returns.

It could lead you to put too much money into developed markets. The destiny instinct works in all sorts of ways: look at how many years it took institutions such as the IMF to accept that the developed world is more likely to grow at 2% a year than 3% a year now — that “normal” can change. It definitely makes everyone put too little into what the industry calls “frontier markets” — even the name screams destiny instinct — but which are, more often than not, fast-growing, middle-income countries such as Vietnam.

That’s despite the fact that frontier markets are where long-term global growth is likely to come from and that these markets are generally cheaper, faster growing, more tech-forward, and crucially much less correlated to other asset classes than most others (they are less integrated into the global economy, so care less when things change elsewhere). You should have a small part of your assets invested here for the very long term. I have favourites. I have written about why you should be in Vietnam, for example. So did Rosling: he told journalists, including me, that the greatest long-term investment was beachfront property in Somalia.

Sadly there isn’t a simple way into that at the moment. But if you do want to be in frontier markets there are plenty of entry points. You should do so via a fund, since one frontier market is risky, but 20 together probably isn’t.

Look at the BlackRock Frontiers Investment Trust. It is a bit too focused on Argentina for me (and its managers seem irritatingly keen to be more in emerging markets than frontier) but has interesting investments elsewhere: 7% in Nigeria, 4% in Bangladesh.

Then there is Aberdeen Frontier Markets. Its short-term performance has been feeble but it is invested in Vietnam, Nigeria, Kenya and Pakistan.

Also consider the Templeton Frontier Markets Fund and the Ashmore Emerging Market Frontier Equity Fund. Both are overly keen on financial stocks but they offer reasonable country diversification and should be fine to buy and forget (for the very long term). Take the former over the latter for now. If you want to go passive (and in markets like these I probably wouldn’t) there is the iShares MSCI Frontier 100 ETF.

If you don’t feel brave enough to put money into any of this lot? Well, as Akamanzi said to Mr Humphrys: “I think you’re the one who has the problem.”

• This article was first published in the Financial Times