According to Tim Price, global strategist and manager of the VT Price Value Portfolio, there are both financial and emotional benefits to international asset diversification. "By investing internationally and across different business sectors, the underlying components of your portfolio will be less highly correlated to each other. With the prices of your equity holdings less likely to move in lock step with each other, the volatility of your portfolio will be lower. The attendant emotional rollercoaster will likely be altogether more bearable."
Investing in Frontier Markets
Agriculture offers a solid way to gain exposure to what the investment community calls "emerging markets," and the even less developed, "frontier markets." Emerging markets, like Brazil, are attractive to investors due to their rapid economic growth and industrialization. Frontier markets have lower market capitalization and liquidity than the more developed, emerging markets. These definitions aren't universally agreed upon, and not always intuitive. For example, China is still considered an emerging market, but does it make sense to call the world's second largest economy "emerging?" Regardless, the investment research firm MSCI has defined these categories and routinely updates their index to reflect the relative status of each country.
What to Look For in Growth Markets
Major institutional investment firms diversifying their portfolios into these agricultural markets are looking for out-sized returns propelled by global labor and land price arbitrage. In one case, a joint Middle East venture is investing $1.3 billion in grain and livestock production across 10 countries around the Black Sea. Of course the risks for achieving these higher returns are somewhat different than normal agriculture risks, such as weather or disease. Growth markets also can experience geopolitical or currency risk, so it's important to understand the foreign region or work with someone who does.
There are many underdeveloped regions of the world with the right combination of sun, soil, and water to grow many types of crops. But in many areas skilled labor, a solid legal framework for owning land, as well as road and port infrastructure to bring goods to market are limited. Arif Naqvi, chief executive of Dubai's multi-billion private equity firm, the Abraaj Group, routinely invests in Asia, Africa, and Latin America. He prefers to call these regions "growth markets" and argues that prior to investing in a region, four important macro questions must be answered: How Open is the government to reform? To what degree is urbanization occurring? What is the average consumer age? Is there a developing middle class?
Answers to these questions help investors identify opportunities while mitigating the risks in rapidly growing markets.