Carolyn Cohn London

As emerging markets have tumbled this year, the riskiest country groupings on the fringes have been a haven.

Small markets, local stories and, in some cases, pegged currencies backed by strong central bank reserves have shielded frontier markets.

Lebanon, Tunisia, Bulgaria, Lithuania, Qatar and Kuwait are outperforming more mainstream emerging markets.

The benchmark MSCI frontiers index has eked out a 1 percent rise in total returns this year, but that compares with a 7.4 percent loss in emerging markets and a 5.4 percent drop in developed nation stocks.

Far from the widespread advice to be hyper-selective right now within the emerging markets universe, sticking with the broad frontiers index may have been the most reliable play over the past year.

Last year, too, emerging stocks, bonds and currencies fell as investors fretted about lower growth in countries such as Brazil and China and the end of the US Federal Reserve’s stimulus programme.

But frontier stocks and bonds rose, boosted in markets such as sub-Saharan Africa by a stronger growth outlook.

The so-called fragile five currencies of Brazil, India, Indonesia, South Africa and Turkey have suffered sharp losses over the past 12 months.

But many frontier markets, including the Persian Gulf countries of Kuwait, Qatar and the United Arab Emirates, have currencies pegged to the dollar.

Pegs can be a problem if central banks run out of reserves. But these oil-producing countries could most likely ride out the current volatility if push came to shove.

These three countries make up more than 50 percent of the frontiers index, helping to explain its outperformance.

Other top-performing frontier markets this year include Bulgaria and Lithuania, which have currencies linked to the still relatively buoyant euro.

Frontier markets, named for the relative difficulty of getting in and out of them, have won far less foreign investment than emerging markets and so have been less prone to the flight of speculative hot money.

Because of this lack of liquidity, there is also a lack of correlation between them and other markets, and between individual frontier markets.

Investors look more closely at local factors instead.


frontier currencies that are not pegged get driven by a lot of internal factors,” said Angus Downie at Ecobank.

Ghana’s cedi has plunged. But investors say this is because new energy resources have encouraged high government debt.

Some of last year’s frontier darlings, Nigeria and Mauritius in particular, are now feeling the global sell-off.

And investors may have to sell the bad with the good in the event of a larger-scale sell-off, to meet client redemptions from their funds. – Reuters