frontier markets

By Tomás Guerrero, ESADE Business School

During 2013, frontier markets’ performance was well above emerging markets. The reference index for emerging economies, the MSCI EM, ended 2013 falling by 2.6 per cent, while the benchmark for funds operating in frontier markets, the MSCI FM, gained 26.3 per cent. The BRICS’ stock markets experienced significant declines, with the exception of China, whereas frontier markets became the most profitable in the world.

In the cases of Bulgaria, UAE, Argentina and Kenya gains were above 50 per cent. Currently, this trend continues. So far this year, the MSCI FM has increased 18.5 per cent, while the MSCI EM has posted only a 5.1 per cent increase. 

By Tomás Guerrero, ESADE Business School

In the last months, some isolated events such as the suspension of the Nigerian Central Bank governor, Lamido Sanusi, and the outbreak of the Ukrainian conflict, have set the alarm bells ringing. Frontier markets could be a bubble about to explode.

Though, the reality in this diverse set of countries is far away from the forecasts of the doomsayers. In the case of Ukraine, whose weight in the MSCI FM – the frontier market index – is negligible (0.1%), the stress prompted by the Russian occupation has not shaken investor confidence. The PFTS Index, the benchmark index of the Ukrainian stock exchange, has gained a 36.3 per cent since the beginning of the year and a 39.1 per cent since May 2013. 

Last week this blog looked at the investment case for Iraq under the headline: “A frontier too far?” So we were struck by a new report today on neighbouring Iran with the opening line: “Iran is beyond the final frontier for portfolio investors.”

One can quibble about which frontier is further but in truth investment in Iran is not so outlandish. The nuclear deal struck between Iran and several world powers in November prompted a renewed look at the investment case for Iran, as has been the case for other markets that have come in from the cold after international isolation, most recently Burma. But in fact, even in isolation, Iran’s capital markets have grown just fine. 

There are frontier investment markets, and then there is Iraq. Bombings and fighting killed at least 42 people on Thursday alone, in nine or more separate explosions from Baghdad to Fallujah; yet so commonplace is the violence that the news merited few headlines. After all, at least 24 had died in explosions the previous day.

Yet despite the violence and uncertainty, fund managers and bankers are venturing in to the country, attracted by oil wealth and a surprisingly upbeat outlook for national GDP growth. 

The fondness felt by investors towards frontier markets has not dissipated since turmoil struck their emerging market cousins in October last year. In fact, feelings have climbed to a new pitch of devotion.

But the chart below raises an obvious question – has the ardour been overdone? Only rarely in the recent past have FM equity valuations traded at such a generous premium to EM counterparts. 

Frontier markets are poised at the extremities of market capitalism, a position that often equates to life on the edge for investors. But so far this year, this exotic asset class of outliers has performed more like a haven from the turmoil of better established emerging markets, writes James Kynge.

However, the relative calm of the frontier asset class is now coming under increasing threat from convulsions among member countries, particularly Nigeria and Ukraine. 

Frontier markets climbed by almost a third over the past year, while emerging markets fell. James Mackintosh, investment editor, analyses why and whether this can continue.

The third in our series of guest posts on the outlook for 2014 is by Charles Robertson of Renaissance Capital

Two ideas led me to join an emerging and frontier markets investment bank in 2010. First, having seen massive credit growth in developed markets (DM) drive up asset prices, it seemed likely that the DM story was over for years to come. Emerging markets, from Rwanda to Russia, with private sector debt at 10-50 per cent of GDP had room to boom.

Second, I believed we were re-running a 40-year cycle that meant the post-2008 period would look much like post-1973. Equities would do better than bonds. EM equities would only gently outperform DM but there would be a few (hard to predict) markets that would be responsible for all this outperformance. Getting exposure to as many as possible was sensible – so avoiding a single-country broker, or a bank primarily exposed to DM, was key.

Oddly it was the less obvious reason – the 1970s comparison – which has been the better call. 

Frontier markets have come out of 2013 a lot better than emerging ones, as the FT’s Robin Wigglesworth noted.

The MSCI Frontier Markets index has risen more than 17 per cent this year, compared with a 2.9 per cent loss for the bigger MSCI Emerging Markets index. 

Kyle Bass, a hedge fund manager who made a fortune betting against Greek bonds and US subprime, dropped a bombshell at a conference in September: he is investing in Argentina, Latin America’s perennial problem child and a nemesis of hedge funds, writes Robin Wigglesworth.

While many emerging markets have disappointed investors in recent years, so-called “frontier markets” have on the whole performed well. Even the US Federal Reserve’s plans to scale back its monetary stimulus – which triggered turmoil across the developing world last summer – only dented this year’s returns. 

Frontier markets are up 15 per cent in 2013, compared with a 2 per cent rise in emerging markets. Rob Minto of beyondbrics looks at the factors driving the success of frontier markets, and at whether investors have missed the rally.

Remember those Genghis bonds?

Back in November, eyebrows were raised in the emerging markets debt investment community when Mongolia – a country that has been rescued five times in the past 22 years by the International Monetary Fund – managed to raise $1.5bn at a price below Spain’s borrowing costs.

At the time, many took the sale – equal to nearly one-fifth of the size of Mongolia’s economy and akin to the US borrowing $2.5tn in one go – as yet another sign that investors, flushed with cash and desperate for yields, were jumping into markets that they don’t fully understand.

Fast forward eight months and the skeptics appeared to have been proved right. 

In all the general sell-off carnage of the last few days, EM investors might be forgiven for thinking, “what about the frontier?”

Whether you look at the week, the sell-off since late May, or even year-to-date, frontier markets have outperformed emerging markets. Why? 

Frontier markets – a disparate group of countries ranging from Trinidad & Tobago in the Caribbean and oil-rich Nigeria in Africa to Bangladesh in Asia – are having their moment in the sun.

With growth in emerging markets beginning to slow, investors are throwing caution to the wind and scrambling to put their cash to work in these small and often illiquid markets. Here are a couple of charts looking at their rise. 

Where are the best prospects among emerging nations? Not in the Brics countries, according to data on business optimism in 44 developed and emerging markets collated by Grant Thornton International, a network of business advisory firms. For the first time since it began collecting the data a decade ago, none of the Brics is among its top five countries.