The Wall Street Journal is running an infograph (infographic? infographical?) that illustrates rather vividly the limits of investing in markets like Laos:
The most noteworthy point here is annual FDI to the country. Even with the “boom” in foreign money coming in, FDI still isn’t forecasted to reach even US$2 billion–in an economy whose total size is US$9 billion.
And yet, FDI is expanding something on the order of 40% a year.
If you start at the bottom, the only direction to go is up. And to give you an idea of just how low Laos’ starting point is, even Madagascar, even South Sudan, even Zimbabwe has a larger economy than Laos.
I’m obviously all for diversification and greater investment opportunities in underdeveloped markets. But it only works out if we keep our heads screwed on straight. Whenever the next broader market scare comes–and it will come–people will still need somewhere to go. Laos, as an answer to this question, will get filled up pretty fast.
I’m going to assume for the sake of argument that the phantom-froth-hype element of that $9 billion GDP figure cancels out the unreported informal economy element. So even with 100 more uncorrelated markets like Laos, it still wouldn’t come close to accommodating the sheer scale of capital that needs something besides US Treasuries during times of market duress.
This is actually going to be a few charts, because the first chart as you can see looks ridiculous:
It should go without saying that there’s something very wrong with this picture, and indeed Miguel Octavio sums it up better than anyone I know here, but the long and short of it is that runaway inflation and an ass-headed capital controls regime has wildly overstated the “returns” in Venezuela. So let’s get rid of Venezuela and look at how the rest of these stack up against the Dow Jones Industrial Average. Here’s what we get:
This is a five minute segment, I can’t find a transcript of it anywhere, and since I have little faith in the permanence of this video’s availability, I thought I would take a few minutes to do a quick transcription. Leopard Capital’s Doug Clayton, whom we last heard from here, went on CNBC Asia last Thursday to discuss frontier markets. Much like CNN, CNBC’s level of sophistication I find to be nothing less than infantile within the US context, but fortunately its foreign bureaus seem to appreciate the importance of a quality conversation and this interview is no exception.
As for Clayton, he opens with the claim that frontier markets are “high growth, low risk”, which I personally find slightly misleading, but other than that minor point, he has some interesting things to say here:
Martin Soong: As China’s and India’s economies show signs of slowing, is it time to turn attention to other markets in Asia for opportunity? Doug Clayton is managing partner at Leopard Capital, he joins our guesthouse with Slim Feriani of Advanced Emerging Capital. Doug, good to see you, welcome back and we talked about a month or so ago, when you were up in Hong Kong. Have your views changed at all on frontier markets? Continue reading →