Top frontier markets lure investors with promising returns reports Aite

Kuwait is among the top frontier markets identified by Aite

A sustained rally in frontier markets is leading an expansion of size and liquidity as investors seek opportunities that are not available in the developed or emerging markets, according to a new report by research house Aite, which notes that many frontier exchanges have invested in technology and upgrades, while data vendors report increasing demand for coverage on these venues.

Frontier markets are countries like Saudi Arabia, Morocco, Ukraine, Bulgaria, Argentina, Colombia, Pakistan, Sri Lanka, Vietnam, Iraq, Iran and Kazakhstan. As a group, they show higher growth rates than developed or emerging markets. In its report, Emerging World: exploring the new frontier, Aite notes that these markets are becoming increasingly attractive to investors, particularly since the conventional emerging markets like Brazil have seen lower growth rates since the financial crisis.

The factors driving growth include solid macroeconomic fundamentals and growth prospects, market outperformance, reasonable valuations, low volatility and low correlations to developed and emerging markets.   Investors are also attracted by the opportunity to diversify their portfolio, which allows them to get the maximum level of risk versus return and protects against the risk of sudden, severe losses.

The biggest frontier markets by market capitalisation are Kuwait ($120 billion), Nigeria ($80 billion) and Morocco ($60 billion), followed by Argentina and Bangladesh, according to figures provided by the World Federation of Exchanges. However, frontier markets can be measured in different ways. Vietnam and Nigeria have a higher average daily trading volumes, while Bangladesh, Romania and Oman are smaller than Argentina and Morocco but have greater liquidity. Aite considers Kuwait and Nigeria as favourable markets, while Argentina carries higher premiums due to the government’s unfavourable decisions towards the finance sector, such as unilaterally nationalising pensions.

A country’s status as a frontier market is not set in stone, but changes quickly over time. Qatar and the United Arab Emirates, which were included in the MSCI Frontier Index until April this year, when they were upgraded to emerging market status. Argentina was downgraded from emerging to frontier market status in 2009, while Morocco was downgraded in 2013.

Classification as a frontier market can benefit a country in the right circumstances. For example, Morocco is cited by the WFE as a country that struggled to attract interest in the ‘emerging markets’ category because it represented only 0.1% of that index. However, once moved to the ‘frontier’ index, its profile became much higher because of its greater weighting within the group. The same applied to listed companies – for example, Morocco’s Maroc Telecom became the largest holding in the Frontier index, with a market capitalisation of $11 billion. The WFE stated that this resulted in increased interest, additional capital flows and improved trading volumes.

The best frontier markets identified by Aite include Kuwait, Nigeria, Vietnam, Argentina, Morocco, Bangladesh, Oman and Romania. The threshold between frontier and emerging markets can be blurry, so classification tends to favour whichever countries are located towards the top of their group.

Aite also notes that exchange technology is driving confidence in frontier markets, especially since there is a significant trend towards buying technology from global providers, such as Nasdaq OMX, Cinnober, Millennium IT and Deutsche Börse. Of these, Nasdaq OMX is by far the most prolific, with markets using its platform in Abu Dhabi, Bahrain, Turkey, Malaysia, Budapest, Colombia, Pakistan, Iraq, Egypt, Indonesia, Kuwait, Nigeria, the Philippines, Sadui Arabia and Croatia. This all contributes to the stability and appeal of these markets to the international community.

“Frontier markets have emerged as an attractive new asset for investors seeking opportunities beyond emerging markets, which have experienced challenging market environments in recent years,” read the report. “Frontier markets have significantly outperformed their larger and more liquid cousins since 2012. These markets’ popularity has staying power and they are more than merely an emerging-market substitute.”