Explaining recent performance, Lowcock says there are common characteristics across the asset class which have assisted returns. A lot of frontier markets are, for example, rich in natural resources. In part, this is because Africa makes up such a big chunk of the asset class and is home to more than two-thirds of the world’s mineral reserves and more than half of the world’s gold, platinum and diamonds.
“Commodities, having suffered a big correction began to recover in 2016 and 2017 which is supportive of the frontier markets economies as investment returns to the sector,” he says.
Attractive frontiers
“Demographics is also on their side,” adds Lowcock. “The west is getting old, but frontier markets have young and growing populations. The means there is a growing work force and usually with that comes growing productivity and GDP in country.”
While political stability has traditionally been used as an argument to avoid both emerging and frontier markets, Lowcock adds that an improving political situation offers an opportunity to invest and markets tend to revalue.
“Argentina is showing signs of improvement and has a better political landscape although equity markets haven’t necessarily reflected all this. Kenya is arguably on the other end of this as political instability is rising there. This highlights the inherent risk of investing in frontier markets and the importance of having expertise in the sector.
Overall though, Lowcock recommends that frontier markets shouldn’t constitute more than 1-2% of a portfolio and investors should expect performance to be extremely volatile.
So, any funds he would identify? He picks out the iShares MSCI Frontier ETF, which seeks to track the investment results of the MSCI Frontier Markets 100 Index, and the Blackrock Frontiers investment trust, which aims to achieve long-term capital growth from investment in companies operating in frontier markets or whose stocks are listed on the stock markets of such countries.
