Many people seek out start-up companies for investment, but how about start-up countries?
A good example is Kosovo. The former Serbian province burst onto the international scene in the late ‘90s, when NATO intervened in what was until then a Balkan civil war. Conflict between the Albanian Muslims and the Orthodox Serbs goes back at least to World War II, although the first Battle of Kosovo was fought in 1389.
Because of NATO’s actions, Kosovars idolize all things American. Bill Clinton and Madeleine Albright are heroes, with statues honoring them along boulevards in the capital city. The Kosovar economy is grim, however, with unemployment exceeding 20% and a net trade deficit close to 45% of GDP. Its closest neighbor and natural trading partner, Serbia, is currently its sworn enemy, refusing to recognize its legitimacy.
Why is this significant? Because situations like Kosovo are precisely where investment opportunities lie. When a country emerges from war or political chaos most investors shy away, mistaking uncertainty for risk. Prices well below a company’s intrinsic value are the result. Many firms in the former Yugoslavia trade at trailing price/earnings ratios of 4 to 7—a half to a third of valuations in the developed world.
Cheap valuations mean higher long-term returns, for those with the financial flexibility to wait. There are frontier markets all over the world–the Balkans, Vietnam, Nigeria—and the opportunities seem boundless. Favorable demographics must contend with unresolved political issues, and finding a trustworthy partner in these markets can be challenging. But for long-term investors, such markets truly are on the cutting edge.
Douglas R. Tengdin, CFA
Chief Investment Officer
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