Winners and losers from fall in oil price

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Frontier markets - May 2015

When investing in more developed regions of the world, such as the US, Japan and the UK, investors are usually aware of the global headwinds and tailwinds likely to affect those nations.

But frontier markets encompass such a wide range of countries located all over the world, with economies at various stages of development, that they tend to be more influenced by local economic factors as opposed to global risks.

Michael Levy, investment manager of the Baring Frontier Markets fund, notes that frontier markets have a lower correlation to developed markets than their emerging markets counterparts – 0.49 compared with 0.84.

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Sam Vecht, co-manager of the BlackRock Frontiers Investment Trust, suggests that is one of the benefits of investing in frontiers. “If you take the developed world, pretty much when the S&P [500 index] goes up, the rest of the world goes up and there are not many exceptions to that,” he explains.

“But frontier markets are much more driven by local factors. They move in idiosyncratic ways and that means the correlations between markets are low.”

He continues: “When you ask, what headwinds does the region face? It’s a very diverse selection of countries, and there isn’t any one global factor that’s going to dominate. So I think it’s very difficult to look at the whole collection of frontier countries as benefiting or losing from one particular development.”

One global factor that has affected many frontier markets, though, has been the sharp decline in the price of oil. While many investors might assume the falling price would be a headwind for frontier markets, there are some countries that have benefited.

Mr Levy explains: “Many frontier market countries are net oil importers, positioned to benefit from the oil price fall.

“For oil exporters, much depends on the reaction of the authorities in countries that are affected. In the case of Saudi Arabia, the government has maintained its commitment to spending in areas such as education and healthcare. This has reassured the market and has been beneficial for companies operating in those sectors.”

Mr Vecht observes: “If we look across the range of frontier markets, there are winners and losers from the [declining] oil price. I think there’s been a lot of focus on the loser nations, such as Nigeria and countries in the Middle East including Kuwait, Oman and Saudi Arabia, [the latter of] which is not even in the frontier index.

“But many frontier countries are winners from the fall in the oil price, such as Pakistan, Bangladesh and Sri Lanka.”

Paul Clark, Africa equities specialist at Ashburton Investments, believes there is a perception that commodities are a big driver of growth among African frontier markets, but that is only true to a certain extent. He points to Nigeria and Angola as countries with economies that are far more reliant on a higher oil price for growth than some other parts of Africa.