Frontier markets are the new emerging markets, suggests Schroders
Investors should look to frontier markets rather than emerging markets to access the most dynamic and fastest growing economies and secular growth drivers, says Schroders.
The fund provider says that frontier markets offer investment opportunities that are getting less risky as market liberalisation accelerates, and that valuations look attractive in absolute terms versus the developed and emerging world. It defines frontier markets as typically low and middle income countries with relatively under-developed capital markets compared to their global emerging markets (GEMs) peers.
Frontier markets’ relatively low correlation with developed and emerging markets offers investors significant potential diversification benefits, especially in the global macro environment dominated by uncertainties. Currently frontier markets comprise 26 markets spanning Asia, Eastern Europe, Africa, Latin America and the Middle East.
Schroders say that frontier economies are at the early stage of development and are expected to grow faster than emerging and developed economies resulting from a number of secular growth drivers. Given the poor fundamentals in the developed world, the emerging and frontier countries are in fact less risky and are generally under-owned.
Frontier markets offer attractive investment opportunities; undeveloped relative to their economies and offer potential significant diversification benefits and attractive valuations.
Frontier markets have a higher dividend yield, around 5% on average than GEMs; once again an attractive attribute in times of elevated global market uncertainty.
Recent lagging stock market performance has also led to attractive valuations for investors. Despite frontier economies continuing to deliver strong economic growth and frontier companies generating strong earnings growth, Schroders says frontier markets are still 46% off their 2008 highs and are lagging GEMs.
Many frontier markets are also ranked better than the BRICs and Italy, on both the Corruption Perceptions Index and the World Bank Ease of Doing Business Survey in 2011.
Despite rising interests in frontier markets, Allan Conway, head of Schroders Global Emerging Market Equities warn investors that frontiers markets can be more susceptible to economic, social and political changes than their developed peers due to their undergoing rapid development.
He added: “One of the single largest risks to the Middle East region, together with natural resource rich countries such as Nigeria and Kazakhstan, is a severe prolonged fall in the oil price. Budgets in the GCC (Gulf Cooperation Council) are currently conservatively based on around $75/barrel oil price with any excess creating a budget surplus. Any short term fall in the oil price below this level could easily be covered by large existing cash reserves. However, a prolonged deterioration in the oil price would put pressure on government-led investment and hamper growth prospects. Today, energy prices look well supported owing to supply constraints in Iran and resilient energy demand from Emerging Markets, although to some extent this is countered by weak developed world growth.”