Frontier Markets  

‘Highly diverse’ raft of opportunities for diligent investors

This article is part of
The Guide: Investing in Frontier Markets

‘Highly diverse’ raft of opportunities for diligent investors

Frontier markets are sometimes dismissed as an area for niche investors or those with much higher risk appetites. But while these assertions have merit, there are reasons to ask whether investors are overlooking some opportunities.

The MSCI Frontier Market index has generally tended to lag its Emerging Markets counterpart. For the year to date to May 4, the smaller Frontier Markets benchmark gained 6 per cent in sterling terms, while the MSCI Emerging Markets index climbed 9.2 per cent, data from FE shows. 

But as with emerging markets, the all-encompassing description of frontier markets hides a significant divergence in performance. Of the 22 country indices placed by MSCI in the frontier markets basket – excluding the West African Economic and Monetary Union – the year-to-date performance ranges from a gain of 34.8 per cent for the MSCI Argentina index to a fall of 10.7 per cent in the MSCI Oman index. This highlights the importance of investor research when looking into the space, with some regions offering more opportunities than others. 

For example, James Johnstone, co-head of the emerging and frontier market team at RWC, points out the recent progress of economic reforms has continued apace in Saudi Arabia under the leadership of the deputy crown prince. 

Mr Johnstone says: “We believe the recent reversal of certain austerity measures combined with encouraging corporate earnings will lead to a recovery in the $450bn [£347bn] Saudi stockmarket, which has very limited current foreign ownership. 

“Combined with its potential inclusion into both the FTSE and MSCI indices in the next couple of years, we are increasing our exposure to Saudi Arabia across both the consumer and financial sectors.”

Argentina is another country that has weathered political and economic storms in recent years. After a period of healthy stockmarket performance, the MSCI Argentina index is ranked top in sterling terms across three- and five-year periods against frontier market peers, and is second in the 12 months to May 4. 

Having previously been downgraded to frontier market status in 2009, MSCI announced in March this year proposals for the country to be promoted back to an emerging market. The decision is expected to be made in June, and if successful reclassification could occur in May 2018. 

Away from the Middle East and Latin America, Alan Nolan, frontier market product specialist at BMO LGM, notes there has been a strong start to 2017 for frontier countries. “Currencies have experienced significant adjustments in many markets, driven by changes in the oil price and the strength of the dollar,” Mr Nolan says. 

“The long-term case for frontier markets remains firmly intact, offering investors opportunities across a highly diverse set of markets. We believe frontier markets will deliver more attractive returns versus other global equities in the coming years.

“Africa is currently out of favour with many investors, but not us. After investor excitement in the region during 2013-14, currencies are now much cheaper than they were in the same period, which is presenting more compelling opportunities for investors.”