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2020: The Changing Face of Frontier Markets

Oliver Bell, Portfolio Manager, Frontier Markets Equity Strategy

On the 3rd anniversary of the T. Rowe Price Frontier Markets Equity Strategy, portfolio manager Oliver Bell looks forward to the future and ponders what the frontier universe could look like in 2020.

Change is omnipresent within frontier markets. We have just recently seen Pakistan elevated to emerging market status once again. MSCI's reclassification in May reduces the number of countries in the MSCI Frontier Markets Index to 231, but Pakistan has come out of the frontier universe for all the right reasons. Significant improvements in its economic, political, and security backdrop mean that a relatively volatile environment has evolved into a much more stable one in which well-managed companies can potentially thrive.

Pakistan's GDP growth rate has continued to accelerate and it now has the lowest levels of inflation and interest rates in generations, while the currency has been relatively stable. At the same time, we have more political stability with a government recently completing a full term for the first time since the country’s independence nearly 70 years ago.

However, while Pakistan has been a good story for investors in recent years, risks are building in both the economy and the political sphere. Longer term, further reform and development are still needed for Pakistan to make the jump to be a true “Asian tiger." To achieve these growth rates, the country needs to tackle a number of issues, with infrastructure at the head of these. The progress of the US$46bn China/Pakistan Economic Corridor (CPEC) infrastructure project is a good start.

What could frontier markets look like in 2020? In recent years, Qatar and the United Arab Emirates have also been reclassified from frontier to emerging markets. So, as more countries move along this path to prosperity, who will be next and how will the frontier universe evolve going forward?

Potential Moves


Although MSCI recently announced that the MSCI Argentina Index will remain as a frontier market, we expect Argentina to be in line for an upgrade to emerging markets in 2018. Argentina’s reversal of fortune dates back to October 2015, when we witnessed much needed change in politics through the election of business-friendly Mauricio Macri as President. He swiftly implemented reforms that returned some form of normality to Argentina and the markets have rewarded that.

What we need now is to see further political reforms and inward investment to deliver sustainable growth in the economy. If Macri can consolidate power in the legislative elections coming up in October, the reform drive will have a great chance of continuing.

Saudi Arabia

Saudi Arabia is currently classified as a standalone country, and there has always been conjecture on whether or not after reforms and improvements if it would come into the MSCI Frontier Markets Index or move directly to the MSCI Emerging Markets Index.

MSCI noted in June of the potential for it to move directly to emerging markets status in 2018. Right now they are only going through a consultation period, but the potential for Saudi Arabia is huge. The reason for optimism is that Saudi Arabia is by far the largest Middle Eastern market – it has over 165 stocks, a market capitalisation of approximately US$530bn (around 50% of the market cap of Gulf Cooperation Council (GCC) countries), and trades up to US$4bn per day. In terms of its size and liquidity, its equity market outstrips all others in the Middle East region. It is also more diversified than other countries with neither energy nor financials sectors dominating the index.

The Saudi economy has been slowing down, however, with lower oil prices revenues having put pressure on the fiscal deficit, international reserves and liquidity. The country still needs to diversify its economy away from oil and the 2030 Vision announced last year does provide some encouragement that there has been a mind shift in the kingdom to develop other areas of its economy.


Peru has long been, and still is, one of Latin America’s strongest growth performers. It has been able to achieve a decent level of economic diversification – with a number of reputable businesses housed within its bank, property and retail sectors.

However, Peru's emerging markets status remains 'on watch', given only three of its stocks (one of which is US-listed) meet the liquidity requirements of the MSCI Emerging Markets Index – with three being the minimum number needed to meet the threshold. A downgrade was initially ruled out last year, but this could still happen. We would view any reclassification as a positive given the increased scrutiny by foreign investors across a wider range of quality Peruvian companies.


Nigeria still has the potential to exit frontier markets and become a standalone market, similar to Saudi Arabia today, primarily due to the inadequate levels of liquidity in its FX market. MSCI recently announced that any decision would be delayed "to allow more time for international institutional investors to better assess the effectiveness of the new FX trading window."

But, Nigeria has struggled in recent years due to falling oil revenues, and although there are some positive under-the-radar developments in the country since the arrival of President Muhammadu Buhari in 2015, it is still a country in need of reform. Nigeria would still attract investors if it left the frontier index, but more importantly it would have major ramifications for weightings in remaining countries as it currently makes up almost 8% of the index2.


Iran, the second-largest economy in the MENA region after Saudi Arabia, is the major unknown. We went on a fact-finding mission to the country in early 2016, prior to the lifting of international sanctions. We found a country that is well-educated, entrepreneurial, and asset rich, but that remains cash flow poor because of the sanctions that have been in place since 1979.

In addition to the politics, many significant issues remain – Iran is regularly ranked towards the lower end of any business transparency and corruption rankings for example – and institutional investors will probably face some challenges in areas of liquidity and corporate governance.

However, challenges such as these are not uncommon as markets open up, and there are always areas for experienced investors to uncover neglected companies with healthy or improving operations. Putting aside these issues, the established and diverse stock market would be a welcome addition to the frontier universe.

Evolving Universe Will Create Opportunities

Overall, there is much to look forward to in frontier markets. Macroeconomic fundamentals and demographics in many frontier markets today are favourable and, in some cases, resemble those of many emerging countries approximately 15 to 20 years ago. We maintain our strong belief in the long-term investment thesis for frontier markets which is based on a combination of increasing levels of peace and stability creating a better political and more democratic environment, which in turn should lead to improved economic management and an inflow of foreign investment. The end result is even stronger economic growth and therefore a tailwind to the corporate sector.

As frontier markets evolve over the coming years, there will be winners and losers. But for investors it is important to recognise that these markets cannot be bought in some kind of package off the shelf. They are very idiosyncratic in nature and require careful analysis. Identifying a theme or a trend will not necessarily make a successful growth investment. Stock returns within the same country and industry can exhibit notable dispersion.

Importantly though, frontier markets should continue to provide a fertile ground for experienced investors to find well-managed, fast growing companies that can deliver compounding growth and strong returns for investors.

1 Source: MSCI [Return to Text]

2 As at 30 June 2017 [Return to Text]

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