atans1

Frontier markets are fashionable

In Vietnam on 14/07/2010 at 5:28 am

What are they?

Frontier investing is a new-enough phenomenon that professionals disagree on which countries make up the sector. Different managers and index providers include different names. The Claymore E.T.F., for example, has Chile and Poland among its top five holdings, though neither is part of the MSCI Frontier Index. The index includes such diverse countries as Argentina, Romania, Kenya and Kazakhstan. It rose 0.66 percent, including dividends, in the first six months this year, compared with a negative total return of 7.57 percent for the Standard & Poor’s 500-stock index. The frontier index has been helped along by positive returns in three of its important markets — Nigeria, Kuwait and Qatar.

Almost everyone, including MSCI, puts Nigeria in the frontier category … “ … the next Brazil?’ it’s Nigeria,” because it also has a large population and a huge base of natural resources.”.

Why

Many but not all of the frontier countries are richly endowed with commodities. As expected from economies on four continents, they’re diverse. Kazakhstan, for example, unearths oil, metals and mineral, while Argentina sells soybeans, corn and wheat. Vietnam excels at manufacturing.

Because of this diversity, their stock returns tend not to move in lock step with those in developed and emerging markets.

“We view frontier markets as attractively valued compared with emerging markets. They didn’t participate in the huge run-up in 2009 that you saw in the emerging markets.”

Problem

Some frontier countries remain more vulnerable to corruption and political crises than the typical developed market

“In the bear market, they got hit hard, so it’s not that they’re protected.”

ANYONE who believes that frontier markets will rise relentlessly should recall 1978 … That was when Time magazine named Deng Xiaoping, who led the overhaul of China’s economy, as its Man of the Year.

“That’s when the world came to the idea that China was opening, and that’s quite a few years ago Since then, the economy has boomed, but the stock market has been on a roller coaster — sagging, for example, during and after the Asian financial crisis that began in 1997. … a lot of these trends are true, but you can go through periods of sharp volatility.”

NYT article

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