Positive Drivers Remain For Resilient Frontier Markets

Frontier markets have faced headwinds over the past 12 months, but what has impressed us at T. Rowe Price has been the resilience of the asset class.

While frontier equities have declined 13% over the last year, and are down 3% year-to-date¹, it should not be forgotten that 40% of the MSCI Frontier Markets Index consists of oil-related companies². Given that oil has roughly halved over this period, it does show the flexibility of frontier markets and their strong domestic-oriented growth fundamentals.

As we look forward, we see some interesting catalysts for investors – namely upcoming elections and political developments.

Argentina is the obvious country to mention here. Should the successor to Cristina Kirchner open up the capital markets, we expect inward investment to flood in. We also recently saw peaceful elections in Nigeria, with the handover of power to the opposition. The new leader is yet to announce his cabinet, but he is rigorously screening all the candidates to check for any signs of corruption. This is a very positive sign and we believe we will get further clarity towards the end of summer.

Another one to watch is Sri Lanka, which just dissolved its parliament for an election in August. The most likely outcome is a unity government for three years, which will be more inclusive and include the Tamils and Muslims more in society. For the past five years the investment into Sri Lanka has primarily come from China – but this government will be looking to attract the likes of India, the UK and the US.

It is also important to mention Pakistan. This country continues to go from strength to strength – through stable politics, strong growth and low inflation. It has been a big beneficiary of the low oil price. Elsewhere, the politics in Bangladesh are beginning to improve after six months of protests. While we are also seeing improved macro management in Romania, Saudi Arabia is opening up to the world and Vietnam is lifting its foreign ownership limit restrictions on a company by company basis.

It is clear we are witnessing positive developments across the frontier universe. There are eight countries where we have more than 8% of the portfolio invested in absolute terms – Argentina, Vietnam, Kenya, Saudi Arabia, Pakistan, Nigeria, Kuwait and Sri Lanka, each providing interesting companies for their own specific, domestic reason.

While they are all interesting for many reasons, liquidity remains an issue for large global and emerging market funds. It is less of an issue with Pakistan while Argentina and Saudi Arabia also offer reasonable liquidity. With the lifting of many foreign ownership limits in September, Vietnam is also set to improve.

The positive side of the relative illiquidity and inability for large funds to access all the stocks and markets is that Frontier markets remain quite an uncorrelated asset class. If emerging markets continue to see outflows, it will be difficult for this to meaningfully disrupt frontier, as the large investors do not really have a foothold in the asset class – unlike what we saw in the MENA market in 2008.

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