Listen to Bell’s discussion:

In recent years, frontier equity markets have been outperforming more well-established emerging markets and even developed international markets. In this interview, based on a three-part podcast series, Portfolio Manager Oliver Bell discusses what’s driving the emergence of these nascent stock markets and where they’re headed. Mr. Bell has 16 years of investment experience; much of it spent researching and managing emerging and frontier market stocks. He joined T. Rowe Price in 2011, when he became manager of the Africa & Middle East Fund. He also manages a broader frontier markets equity strategy for institutional clients.

Q. How do today’s frontier markets as an asset class compare with the larger emerging markets as they were developing, say, 15 years ago?

A. We’re seeing the same sort of cocktail of ingredients, both political and economic, in frontier markets that suggest that they are beginning to look very similar to emerging markets in the late 1990s. Africa, for example, looks very similar to Latin America and Asia in the late ’90s. Of course, there are certain headwinds that pose challenges: slowing Chinese growth, falling oil prices, and the likelihood that the United States will raise interest rates. But we’re talking about a large number of diversified economies that are structurally growing, so I don’t see where the long term is at risk. I see a big transformation in these markets over time, with a lot of IPOs (initial public offerings) of stocks and states withdrawing from state-owned enterprises. So this asset class is going to look very different in just five years.

Q. Specifically, what’s been driving frontier markets’ solid performance in recent years?

A. There are structural drivers and country-specific drivers. On the structural side, the peace dividend is most important. If you go back to the 1990s, almost 50 of these countries were at war or in some sort of conflict. Despite the headlines about conflicts in these regions, today we’re only talking about five countries. The spreading base of peace has enabled the start of proper economic growth and investment.

Q. We constantly hear from around the world about terrorism, ethnic religious conflicts, government corruption, political instability, and epidemics like Ebola. Taking Africa as an example, does the reality you see on the ground differ from the perception from the headlines?

A. First, Africa is an absolutely enormous continent. There’s the wrong impression that if something happens in one part of Africa, it’s bound to affect the whole continent. The reality is that Africa has 54 countries and each has its own individual dynamics. And the inter-relationships among the countries are still relatively light. You quite often have to fly to Paris to travel among neighboring African countries, for example.

You’ve also seen a dramatic rise in democracy in Africa. From 2011 through 2013, 50 out of 54 African nations had elections. They weren’t all perfect, but they were forms of democracy. And as a result, you’re starting to see more political accountability and macroeconomic policies. Many countries are being governed much better than in the past.

Q. Is that one of the reasons why Africa’s economic growth has recently been so strong?

A. Indeed, we are seeing an emphasis on better macro- and micromanagement of these economies. Over the last decade, seven of the 10 fastest-growing economies in the world were from Africa. Some of this is from commodities—Zambia, for example, is a big copper exporter. But there’s also been rapid growth in places like Mozambique, which imports absolutely everything. Each economy is growing for slightly different reasons.

Q. South African stocks account for almost 25% of the fund’s assets. Why?

A. It’s basically a way to gain exposure to some of the companies that are participating in growth in other parts of Africa. Some of these countries don’t have stock markets, or they’re very small, but we want to be exposed to the growth we’re seeing on the ground. South Africa is a much more developed nation, but it has a number of well-run companies that are growing from their investments in the rest of Africa and beyond. If you look at the top 50 South African companies, about 40% of their earnings come from outside South Africa. And in 2014, it’s been one of the better-performing emerging markets.

Q. By contrast, Nigerian stocks did not have a good year in 2014. Is that from the drop in global oil prices?

A. Nigeria is a relatively small weight in the fund. We started reducing these holdings because of the politicking, budget overspending, and currency flight to U.S. dollars that has preceded elections this February. Moreover, the central bank governor who transformed Nigeria’s banking system retired.

And more recently, the price of oil—Nigeria’s main source of revenue—declined. But Nigeria’s long term is bright. A reform agenda has been started, and if the incumbent politicians get elected, you will see a continuation of that. One reform is the privatization of power. They’re only generating about 4,000 megawatts of power for about 175 million people—an extraordinary little amount. If they can upgrade their power system so you have power more than three or four hours a day, there’ll be a massive economic snowball effect.

Q. Looking beyond Africa, where do you see opportunities?

A. In the wake of the Arab Spring protests, there’s been a lot of investment in infrastructure and wage improvements in Saudi Arabia and other Middle Eastern markets to keep up with growing populations, and a lot of companies are exposed to that growth.

Asian frontier markets are at an exciting point. As an example, Vietnam reminds me of Dubai only a few years ago, where you had property and banking crises that are finally being resolved—and valuations are very cheap. Vietnam’s biggest export is mobile phones and its biggest exporter is Samsung. Another example, Sri Lanka, has just come out of a civil war, and that’s allowing investment in infrastructure and economic activity to take off. And even Pakistan, which has been plagued by crises, is now starting to see an awful lot of inward investment and capital.

Q. The opportunity set in frontier markets seems to be mostly focused on the financials sector. Why?

A. We saw this in emerging markets before. The first companies that list tend to be banks and telecommunication firms so they tend to dominate the opportunity set at the start. Over the next five years, however, their weight likely will decrease as consumer and industrial companies come to market. By the way, it’s a very exciting time to be investing in frontier Asian banks—they’re coming off a credit slowdown and they’re all very cheap.

Q. What are the risks in frontier markets now?

A. You’ve had very strong investment returns, but valuations haven’t risen that much because underlying corporate fundamentals have kept pace. We see many companies with 20% earnings growth, and there may be a bubble at some point, but at the moment the market is moving in line with earnings.

Yes, these are nascent capital markets and political systems—and you should expect surprises every now and then—but there’s still room for gains. Investor interest in frontier markets is picking up because their correlation with global markets is relatively low. But in investing in these markets, you should take a very long-term trajectory—at least five years. This shouldn’t be money you may need in a year.

Investing overseas generally carries more risk than investing strictly in U.S. assets. Investing in emerging and frontier markets entails a range of risks, including those associated with volatility, liquidity, regulation, corporate governance, currency rates, and politics.

Samsung represented 0.0% of the Africa & Middle East Fund as of 9/30/14.

T. Rowe Price Investment Services, Inc. Distributor.