BeyondBrics Review: Is Nigeria really the most attractive frontier market?

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32h8_small“Buy when there’s blood in the streets,” Baron Rothschild once famously said. Applying that wisdom to emerging markets, Gavin Serkin names Nigeria as the most promising emerging market for the next decade. Is he right?

Looking for “the best place in the world to put your money”, Serkin, Emerging Markets editor-at-large at Bloomberg, traveled to 10 preselected emerging markets. Armed with ‘excel spread sheets’ and taking along emerging markets investors such as Mark Mobius, he visited Kenya, Myanmar, Romania, Argentina, Vietnam, Nigeria, Egypt, Saudi Arabia, Sri Lanka, and Ghana. The results of that emerging market Odyssey are in his book “Frontier”. Its conclusion is surprising: the world’s most promising emerging market is also one of the most violent.

From page 1, Serkin sets the tone for a book full of anecdotes gathered on the road. “Arriving to Kenya’s Kenyatta airport feels like entering a war zone,” he writes. Entering that “war zone” might put him in danger, but it is the right approach: emerging markets can’t be assessed from behind a desk or a Bloomberg terminal. You need to get your feet on the ground to really get to know what’s going on.

Further on, Serkin confirms what Wolfgang Fengler wrote in beyondbrics a few months ago: The biggest difference between the developed and developing worlds is the likelihood of being confronted with death. Serkin tells us how he saw a man being beheaded in Saudi Arabia “for possessing alcohol”, how he got arrested in Egypt for taking pictures of a man who appeared to lay lifeless in the streets, and how he saw his Nigerian cab driver being beaten until he bled for refusing to pay bribes to a police man.

But for emerging market investors, as long as such aggression remains at a fairly contained level below that of civil war, it forms an acceptable part of the investing reality. State repression, it turns out, is just another risk to factor in when assessing a market.

The same is true for moderately corrupt but stable governments, or communist regimes that allow for economic freedom. “As a fixed-income investor you want stability and continuity,” TCW’s Brett Rowley told Serkin in Kenya. It’s a reason for Rowley to be pragmatic on the country’s cliquey political system. Mark Mobius, the EMs godfather, even gets philosophical talking to Serkin in communist Vietnam: “If you go back to Aristotle, the ideal form of governance was a benevolent dictatorship, and communists have tried to achieve that.”

Even death can be an economic event, Serkin finds out in Ghana. One person he met spent over $10,000 on a funeral, conveying the body from Accra to their home in eastern Ghana, and inviting 550 guests to the customary seven day celebration. “Don’t die in Ghana, it’s too expensive,” Wells Fargo’s Derrick Irwin tells Serkin later, to then add the kicker: “But it makes funeral insurance a great business to be in.”

Metaphorically, Argentina may also be about to earn money from death. It is looking to exploit the “Vaca Muerta” or “Dead Cow” shale fields in the country’s south, a resource of vast potential covering 21,250 sq km. YPF, the battered nationalized energy company, could experience something of a resurrection, following its out-of-court settlement with Repsol and recent contract with Exxon to exploit the shale reserves.

By the end of his book, Serkin offers his ultimate top 10 of emerging frontier markets. Or rather: the top 10 of the investors he traveled with. The number one is Nigeria, which (un)surprisingly, is also one of the most violent countries Serkin visited. “The violence we witnessed during our time in Nigeria was, without exception, in the pursuit of money,” he wrote about that experience.

But bearing in mind the pragmatism with which the investors judge opportunities in frontier markets, Serkin knows why Nigeria is still number one: “Nigeria, after all, is the country that comes the closest to resembling the characteristics of the high growth emerging economies of the past – Brazil, India, China.”

Even the fact that corruption and violence seem to go together in Nigeria doesn’t stop it from being the most promising market. And Sanusi Lamido Sanusi, the suspended Nigerian Central Bank governor who is now Emir of Kano, tells Serkin why: “As a moral issue everybody condemns corruption,” he said. “But corruption hasn’t stopped growth in China or India.”

That may be a somber conclusion. But as a book on emerging markets, Serkin certainly set the standard with “Frontiers”. Written from firsthand experience, it is laced through with the insights of fund managers who invest billions in these markets and is furnished with necessary data to reinforce his observations. Frontiers is a must read for investors wanting to find out how valuation in emerging markets really works.

“Frontier – Exploring the Top Ten Emerging Markets of Tomorrow”, by Gavin Serkin. Bloomberg Press/Wiley. £29.99. Available at Wiley for order now.

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