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.
1 – FM equities vs EM equities: the divergence widens
The MSCI Frontier Market index has gained 13.31 per cent in the first five months of the year – its best start since the index was created five years ago. By contrast, the MSCI Emerging Markets index has fallen 4.4 per cent for the year to the end of May. As analysts at Citi noted: “You have to go back to 2005 to find a year in which FM thrashed EM so decisively.”
The outperformance seen in FM stocks has been pretty broad-based. While frontier markets – United Arab Emirates, Bulgaria, Kenya, Sri Lanka, Nigeria, Pakistan and Vietnam – made up the seven top performing markets this year, the nine worst performing markets – Peru, Czech Republic, Colombia, South Africa, Egypt, Russia, Poland, Chile and Morocco – all hail from the emerging world.
2 – The money just keeps gushing into FM equities
Money flowing into frontier markets equity funds tracked by EPFR, the funds data provider, hit $2.27bn for the year to end of May, a new high for the period.
Citi reckons assets under management in frontier markets has now reached $17bn, up from $12bn in the middle of last year. As its said:
Using EPFR data, funds classified as frontier have seen inflows this year of close to 20% of assets through April — much more than EM funds have seen (8% of assets). So far in May, FM’s have seen $250m inflows versus EM outflows of $1.3b. Moreover, while global funds have been liquidating their EM positions to buy Japan or the US, this has not occurred in frontier, because few global investors own anything there. At the same time, the EM funds are raising their allocation to frontier equities.
The Cornwall Pension Fund and the Clywd Pension Fund in the UK are among those that have recently issued a tender for the management of an active global frontier market equity portfolio. Cornwall is tendering for an initial £60m investment, while Clywd had allocated £7m into an FM asset portfolio.
But despite the increased fund flows, frontier markets for the most part are still relatively small and illiquid. As such, the upswings enjoyed by these markets need to be taken with a pinch of salt.
“Because they are so thinly traded, it does not take a lot of fund flows to propel the market,” said Morgan Harting, a senior portfolio manager at AllianceBernstein. “And that can work in reverse. Those big gains can quickly become big losses if investors decide to pull out.”
Even among the more “advanced” frontier markets like Nigeria, there are the issues of political risk and red tape that investors have to contend with. i.e – In the case of Argentina, which only acquired its “frontier” status after being booted out of the “emerging” category, how easy is it for investors to get their money out given the country’s strict capital controls?
The countries that make up frontier markets are far from homogeneous. Still, Harting, who has hired three new analysts to focus on frontier markets, believes that there are opportunities for investors ready to do their homework.
“There are real opportunities in frontier for investors who devote resources to do independent research into specific company opportunities,” he said. “There are wide differences in valuation between the larger cap frontier companies whose valuations have been pushed up by recent flows and are better covered by brokers, while the smaller cap companies in these markets have been overlooked and present equally strong profitability at lower multiples.”
Source - Internet (Google Frontier Markets)
Frontier markets: Handle with care
Jun 4, 2013