The dramatic political winds of change that swept across Malaysia last month were a reminder of the inherent political risk for any investments. Such risk may be amplified when the new government does not uphold the decisions of the previous one – newly elected Prime Minister Mahathir Mohamad has announced that his administration is cancelling various contracts on national infrastructure projects agreed and signed by his predecessor. Similar incidents have been seen locally when new regimes took over the reins of government.
Frontier markets are high-growth, but are also among the smallest, least mature and least liquid economies. These markets are not developed enough to enter the ’emerging’ stage but are growing rapidly and attracting ambitious investors.
However, the economic and political fragility of these countries bring unequivocal risks, and the investment mantra of higher risks means higher returns would be a natural requirement for most investors. It is customary that investors in frontier markets would expect north of 20% for their return on investment.