Frontier Market Investing

I was recently in Myanmar (Burma) and what I saw completely blew me away.

My family came to India from Burma in 1959 when the military under General Ne Win nationalized all foreign businesses in Burma. A part of my extended family stayed behind in Burma and endured the oppression of successive military governments over the last 50 years. I had met one of my distant uncle's in India several months ago and he had invited me to visit him in Burma to take a look at the environment and opportunities there. After much procrastinantion and reluctance, I finally planned a trip and paid him a visit a few weeks ago.

Yangon (Rangoon) was not like the cold, grey, socialist, dictator ruled city I had expected. It was a neat and clean city with modern roads and a functioning economy. Don't get me wrong. People in Myanmar are poor and the economy is dysfunctional. No one has a bank account and even senior employees of large companies are paid fully in cash. However, the desire for change both within the government and among the people is very strong.

While we can debate whether recent changes are permanent and irreversible or not till the cows come home, the sense I got is that these changes are desired by all and will be very hard to reverse. If anything, the momentum for progressive change is picking up.

I met a very interesting gentleman who runs a financial services firm based in Yangon. He has a presence in 3 countries - Mongolia, Myanmar and Mozambique and is doing very well for himself. He explained his M3 frontier market theory and explained how these three countries will do well do to their links and proximity to India (Myanmar, Mozambique), China (Mongolia, Myanmar), South Africa (Mozambique) and Brazil (Mozambique due to Portuguese heritage).

Another thing that stood out in my visit to Burma was the complete absence of western companies. The biggest presence was of Chinese companies with a number of Indian companies trying to play catch-up. While Europe and the US try to sort out their internal mess and wait (for eternity) for everything in these frontier markets to work on their terms before participating, Indian and Chinese companies are moving in swiftly and capturing whatever business they can. We can debate about the right and wrong of it, but the reality is that the Indians and the Chinese are capturing these markets.

I took away a couple of learnings from my trip.

1) Frontier markets are not the pariahs they used to be. Internet, telecom and satellite television connectivity have completely altered the outlook of the populations of these erstwhile closed countries. The Arab spring was a manifestation of this change. The story of the next few decades will be the rapid integration of these economies into the organized world order.

2) The best way to participate in the growth of these markets is to invest in Indian, Chinese, Brazilian and South African companies that are participating in the growth of these economies. Western companies are already too large to enjoy a meaningful benefit from participating in frontier markets and in any case are behind in the race.

As I was thinking about this, I read yesterday that Jindal Steel and Power of India acquired a coal mine in Botswana from a Canada's CIC Energy for USD 115 million. Jindal is going to build a 1200 MW power plant at the coal mine to supply power starved South Africa located just 30 miles away. It is unlikely that Candian and Australian companies have the ability or the risk appetite to invest in long gestation projects in these frontier markets.

Given the current malaise in the markets, there are many Indian companies with operations in frontier markets that are trading at significant discounts to the intrinsic value of their indian businesses. Their operations in frontier markets are valued as free options and in many cases are even carried with negative value implications (due to capital exposure). In my view it is a good time to start digging in and looking at some of them.