Investors take bets on frontier markets

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New York - As investors dump emerging market equities at an unprecedented clip, they are turning to frontier markets in search of the next growth story.

No exchange-traded fund focused on developing nations has grown faster in the past year than BlackRock’s iShares MSCI Frontier 100 fund, whose biggest holdings are in Kuwait and Qatar. Assets under management surged nine-fold to $594 million (R6.3 billion), fuelled by $465m of inflows and returns of 23 percent.

In contrast, investors have pulled a record $26bn in the period from BlackRock and Vanguard Group’s flagship emerging-market exchange-traded funds, according to Bloomberg data. The MSCI Bric index is down 4 percent this quarter.

While Brazil, Russia, India and China led the global economy out of the 2008 financial crisis, investors have been fleeing the biggest developing nations as their growth sputters.

The Hang Seng China Enterprises index is in a bear market, Brazil has suffered its first credit-rating cut in a decade, and Russia faced international sanctions for its Crimea takeover. Stocks are rallying, meanwhile, in places like Kenya, on oil discoveries, and Vietnam.

“Everybody is looking for the next China,” said US Bank Wealth Management’s Jim Russell. “We think Africa is probably one of the areas.”

Emerging market stocks tripled in the 10 years through 2007, returning more than four times as much as the Standard & Poor’s (S&P) 500 index, as booming global demand for raw materials and the rise of middle classes drove growth. But stocks from the Bric nations have slid 7.1 percent in the past year – compared with a 19 percent gain for the S&P 500 – as investors lost confidence in their growth prospects.

“Traditional emerging markets have struggled under what are very secular changes, and investors have responded… by a reallocation in their portfolios,” Christopher Wolfe at Bank of America Merrill Lynch’s private banking and investment group said. “Frontier markets may be where emerging markets were in late 1980s and early 1990s. You’re really looking for the next 10 to 15 years.”

BlackRock’s frontier markets fund invests just over half its assets in securities from Kuwait, Qatar and the United Arab Emirates. Stakes in companies from Nigeria, Argentina, Kenya and Vietnam are also among its largest holdings.

MSCI, the New York-based provider of stock market indices, says frontier markets need to be accessible to foreign investors and in countries not going through extreme economic and political instability. They tend to have more relaxed liquidity and market-cap requirements. – Bloomberg


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