Citigroup Picks This Island Nation as Top Frontier Investment

International banking and finance experts are recommending that investors start paying more strategic attention to frontier market investment opportunities.

While higher risk, these markets often represent the fastest growth to early investors.

Sri Lanka, an island country off the coast of India, is fast becoming a frontier market to watch, they say. 

In fact, Citigroup executives recently called Sri Lanka one of “the most attractive among frontier markets.”

Citigroup Frontier Markets Strategist Andrew Howell believes that the country has exceptional investment potential.

The net direct foreign investment in Sri Lanka is about $115 million dollars. To put that into context, in 2016 the country saw just $2.5 million in foreign investments in 2016.

Howell believes that numerous opportunities still exist in the country. Increased foreign investment cash flow is necessary for the country to realize its full emerging market potential in the future, he said.

“We thought Sri Lanka was cheap, but it turns out it’s really cheap. It’s a market you probably want to look at closely,” Howell advises.

The net foreign capital entering Sri Lanka’s Colombo Stock Exchange, or CSE, has almost surpassed $26 million dollars annually in recent years.

Howell uses a frontier market rating scale to identify leading frontier market prospect contenders.

This rating scale helps Citigroup identify the 18 leading world frontier markets to better inform their clients and investors

The rating scale model emphasizes six parameters: The frontier market country’s earning momentum, economic imbalances, pricing momentum, macro growth potential, monetary policies and valuation potential.

Investment potential

Countries that qualify as frontier markets usually have only one or two big natural resource exports. Such characteristics make investment there valuable.

As the world grows smaller and interconnected, frontier market countries have an outsized potential to offer investment opportunities to industrially developed and emerging countries.

Even though foreign investment interest has been bullish on Sri Lanka in recent years, local investors and state-operated enterprises have yet to fully realize the country’s growth potential.

The reason for the lack of local investor interest may lie in Sri Lanka’s complete lack of state-controlled pension funds.

Aggressive local investment interest might coax more foreign interest, say local investment pros.

“The only way to trigger growth at the Colombo Stock Exchange is more state participation by way listing state enterprises and aggressive investments, particularly by pension funds,” a local stockbroker told a Sri Lankan investment publication.