October 2014

FRONTIER MARKETS IN NUMBERS: Trend setting

Frontier markets are becoming increasingly popular among investors, partly because they have performed strongly and partly because investors seek diversification. Stefanie Eschenbacher talks to Priscilla Luk of S&P Dow Jones Indices.

Frontier markets have outperformed emerging markets year-to-date, returning 14.6%, compared 12.1% of emerging markets, data provided by S&P Dow Jones Indices shows.

Priscilla Luk, director of global research and design, says this trend started last year. Over the past five years, the annualised return of both markets does not differ significantly: the S&P Emerging BMI index returned 8.4% whereas the S&P Frontier BMI index returned 10%, both lagging developed markets.

Emerging Asia is the biggest sub-region of emerging markets, representing more than 60% of total emerging markets, and the main return driver. 

The countries belonging to the Gulf Corporation Council are the biggest sub-region in the frontier markets, representing 44.8%, and have also been the main performance drivers. “Some countries outperform a lot in three years, but not in five,” Luk says, adding that for frontier markets it is better to compare the returns of three years and five years.

The three best performing countries over the past three and five years have been the UAE, Kenya and Côte d’Ivoire, while the three worst performing ones are Ukraine, Kazakhstan and Croatia. 

“The performance of sectors can also change rapidly and it is difficult for investors to say there is a trend, ” Luk adds. The S&P Emerging BMI index comprises 2,761 stocks, while the S&P Frontier BMI index is 627 stocks. The free float market capitalisation of countries classified as frontier markets by S&P Down Jones Indices is $874 billion (€675.1 billion), but emerging markets is more than 12 times larger.

Luk says correlation between emerging markets and developed markets is rapidly increasing. Emerging market returns had a correlation of 0.87 with developed markets while for frontier markets it was 0.76. 

“Frontier markets are a natural, upcoming return diversifier,” she says, adding that many global asset managers are heavily invested in emerging markets and are seeking diversification. 

Colours“Liquidity and accessibility is still developing – some [frontier markets] have a lot of restrictions on foreign ownership, and lot of stocks are not liquid.” 

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