Laos stock exchange opening suggests opportunities in frontier markets

The news that Laos is to open a stock exchange does not, in itself, bring a raft of immediate new opportunities to investors. The exchange will initially have just two stocks in which to invest and both are state-owned. However, it demonstrates both the extent to which capitalist structures are beginning to penetrate the farthest reaches of Asia and how opportunities are opening up in frontier markets.

Laos' step is important. Although only two stocks - Electricite du Laos Generation Company (EDL), the country's major energy enterprise, and the Banque Pour Le Commerce Exterieur Lao - have listed so far, the South Korean exchange, which has part ownership of the Laos exchange, hopes a further five will list before the end of 2011. It is the Government's latest step towards moving Laos away from a command-led economy. 

The Laos move also highlights the kind of growth rates on offer from some frontier markets. The country grew at 7.7% in 2010 (according to the IMF) and is set to sustain a growth rate in excess of 7.5% for the next five years. It is a key beneficiary of the growth of China, who is hungry for its commodities riches. It has wealth in gold, copper, zinc and lead.

However, it also shows some frontier market perils. The new exchange is likely to have significant restrictions on holdings by foreign investors. All investments have to be made in domestic currency, which is not freely floated. It is these types of restrictions that tend to create the liquidity problems associated with frontier markets. There can be heady gains when everything is moving in the right direction, but significant losses if everyone heads for the door at the same time.

Frontier markets are set to be a big theme for 2011. Schroders has just launched a new fund in this area, run by its established emerging markets team - It believes that there is a strong rationale for investing in Frontier Markets.  They house around 12% of the world's population of which almost 60% is under 30 years of age.  Labour costs tend to be competitive and natural resources abundant. They are under-owned by investors and have not moved up in line with their emerging market peer group since the credit crunch.

A number of other fund groups agree. BlackRock and Advance Emerging Capital have also launched frontier market funds, aiming to take advantage of the opportunities they present.

Frontier markets tend to be a bull market phenomenon. They perform well when global risk appetite is higher. The Laos move shows how they are expanding, and the types of opportunity on offer. 2011 should, in theory, be a good time for the asset class, but investors need a strong nerve.