Frontier markets offer opportunities

This article is part of
Bonds vs Equities - May 2014

Equities have, in general, benefited from the low growth, low interest rate environment more than their fixed income counterparts.

Yet while Europe and North America have surged ahead in the past 12 months, the UK is starting to play catch up. For the year to date to April 30, the MSCI United Kingdom index has delivered a return of 1.68 per cent, just behind the MSCI Europe index return of 2.65 per cent.

Meanwhile even emerging markets have started to recoup some losses, with the MSCI Emerging Markets index recording a loss of just 2.01 per cent year to date. This suggests that by mid year, and almost certainly by year end, it could easily be in positive territory, with the caveat that nothing dramatic occurs in the Ukraine-Russia situation.

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However, the standout performer for the year-to-date and for the past 12 months is frontier markets. The MSCI Frontier Markets index has delivered a return of 11.36 per cent for the year-to-date to April 30, more than four times the return of the MSCI Europe index.

Guy Stephens, managing director at Rowan Dartington Signature, notes: “Frontier markets are the next Emerging Markets and some of these countries could well take up the running. Nigeria appears to be increasingly mentioned and we have seen several Africa orientated investment funds appearing recently.” He adds that when “political and economic challenges from past success overwhelm the newswires it is time for emerging market investors to move on”.

Mr Stephens explains: “Often the best opportunities are to be found where others fear to tread. It is far easier to stay with the herd and deliver an average return with average poor performers and average good performers than break away into new unconventional themes.

“As the West recovers, the rest of the world will benefit but it is unlikely to be the same emerging regions of the last 20 years. The search is on for the new emerging markets.”

But with Qatar and the United Arab Emirates being upgraded to emerging markets this month, this could help boost the returns of the sector, while at the same time allowing investors in frontiers to look for the up and coming regions. Suggestions include Myanmar, Romania and at some point Saudi Arabia.

While equity markets in general have performed well, the equivalent IMA sectors have produced returns in-line with the market and in some cases have outperformed but not by very significant margins. For example, the IMA Europe ex UK sector average return for the year to April 30 is 14.99 per cent, according to FE Analytics, only slightly ahead of the MSCI Europe index return of 12.73 per cent.

For those with risk appetite willing to stay the course, then frontiers seems to be offering some of the strongest opportunities as we start to enter the second half of the year.

Nyree Stewart is features editor at Investment Adviser