upfront and sceptical on frontier markets

No sooner does one growth market disappoint, another is set up to take its place. So seems to be the case with “frontier markets” since their older and more developed emerging markets brother let the side down.

upfront and sceptical on frontier markets


Earlier this week Russell Investments launched an Emerging Markets Extended Opportunities Fund, which widens the EM universe to include frontier markets such as Africa and Eastern Europe.

Russell said these areas represented “less efficient” segments of the asset class and so it was deliberately targeting these opportunities through specialist managers (seven in total) with the aim of enhancing return expectations.

Heaven help us if emerging markets such as China, Brazil and India are now deemed to be efficient.

Not many fund managers or houses have made a consistent name for themselves in emerging markets and they are still extremely volatile markets (demonstrated by the amount gained in the first quarter of this year, which was then halved in the second quarter).

For stock-pickers in particular there is still a lot of inefficiency to be taken advantage of in EM and moving into increasingly under-developed and esoteric markets in search of the next big, undervalued thing screams a bit of desperation.

FM the new EM?

Russell is not alone in this though, just today Schroders released a "Talking Point" paper asking if frontier markets are the new emerging markets.

One of Schroders’ main premises for investing in frontier markets is the secular growth drivers present there. In the paper, Schroders says: "Frontier markets are at the early stage of development and are expected to grow faster than emerging and developed economies.

This is significant from an investment perspective, since economic expansion acts as a key driver of long-term market returns."

Time and again I have heard that GDP growth is not in any way correlated to stock market returns, not least from emerging market managers trying to reconcile slower growth from China with what they deem ample stock market opportunities.

Conversely, lacklustre growth from the US and UK does not seem to have stopped companies domiciled in these countries from performing well, particularly those companies which have diversified revenue streams or a market-leading product that is hard to replicate.

The practice of grouping countries into meaningless regions continues to bamboozle me and serves marketers looking for an attractive concept to flog more than it does investors.

There is no reason frontier markets shouldn’t have good quality, profit-generating companies providing healthy returns for investors in the same way EMs and DMs do.

Whether that provides enough rationale for frontier markets-specific funds I’m yet to be convinced of.



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