Focus on frontier markets – original ‘periphery markets’ take centre stage

Fund managers increasingly paint frontier markets as attractive in their own right, not just in relation to a rapidly deteriorating situation, and outlook, for many developed economies and their capital markets.

The managers point to cheaper valuations, improving liquidity in local markets, superior growth and transparency that is worlds away from the stereotypical pictures of decades past.

Franklin Templeton adds frontier markets correlate much less to leading equity market indices than emerging markets.

It also highlights the lack of credit finance for companies, which means the risk of investing is often more narrowly limited to a business model and political risk. It notes each of these have contracted significantly in recent years.

Schroders‘ head of growth market equities Allan Conway and Edward Evans, product manager for global growth markets, said in a recent paper the most recent developments in financial markets and industrialised countries have „seen to it that investments in frontier markets have become no more risky than the equity markets of advanced economies.“

Their words come after frontier market economies grew seven to eight percent, and over the next two to three years they should expand by 6% to 7% a year, Conway predicts – “which broadly accords with the growth in the global growth markets, but is markedly higher than the global growth of industrialised lands.”

This week our Focus On series will cast its spotlight on investment opportunities, risks, and dynamics in these less-examined parts of the world.

Schroders‘ Conway notes frontier markets, holding just $11bn of foreign capital versus $691bn in emerging markets and representing just 0.4% of global equity markets, are ‘generally under-invested’.

“The equity markets are in relationship to their economies significantly underdeveloped, but opportunities exist in this.“ For example, the 26 countries that make up frontier markets contribute far more to global economic activity than their 0.4% market capitalisation contribution suggests.

The accelerating maturing of their economies and capitalisation of their companies will, as happened in emerging markets, help these economies grow, Conway says.


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