If You Thought Frontier Investing Was High Risk, Here's Comfort
In these days of surging volatility, frontier-market stocks are outperforming their more developed peers.
(Bloomberg) -- Try not to gasp, but in these days of surging volatility, frontier-market stocks are outperforming their more developed peers.
You might think equities in the more remote economies would experience wilder price swings than their developed or emerging-market counterparts, rendering their returns much more modest when the volatility risk is taken into account.
The truth is rather different.
This year, the markets of nations such as Ghana, Argentina and Vietnam are giving the best volatility-adjusted returns among the three MSCI groups, suggesting they have weathered the selloff since late January better than their peers.
And it was the same story in 2017, when frontier nations produced the best risk-adjusted returns for any group in the past decade.
The chart below shows frontier markets typically hand investors either the best or the worst annual returns, when the volatility risk is netted out. There is no middle path. So, if the year-to-date performance is anything to go by, they might well prove to be winners again.
Drilling down into the individual markets, frontier nations also offer some of the safest gains. Year after year, they figure prominently in the world’s 10 best-performing stock markets, not just in absolute terms but on a volatility-adjusted basis too.
Seven of the best 10 equity returns came from frontier or standalone markets last year. True, they also figured in the list of worst returns, but the concentration there is different. In 2017, only four of the worst 10 were frontier markets.
Dollar Returns
What about currency swings? After all, several frontier nations have abandoned their currency pegs after the 2014 drop in oil prices made them too expensive to defend. The resulting volatility should have rendered returns much more modest.
Yet seven of the best 10 U.S. dollar returns last year were made in frontier markets. Prominent on the leader board were Argentina and Kazakhstan, which had freed their currencies just two years earlier.
Over the past 21 years, frontier markets have consistently yielded the best currency-adjusted returns.
Again, the concentration of frontier markets was less pronounced among the worst performers than among the best. The worst two dollar performances last year came from Pakistan and Qatar, both of which are classified by MSCI as emerging markets.
All of which adds to the debate about distinguishing between emerging and frontier markets. Just as the lines between developed and emerging markets are getting blurred as governments restructure and modernize their economies, the same is occurring among less advanced nations. Some say MSCI’s criteria make unlikely bedfellows of some countries, such as South Korea and Pakistan, which are both considered emerging markets. Similarly, it has kept apart some markets with significant similarities, such as Argentina and Egypt.
Such fault lines cast doubt on the wisdom of treating frontier markets as fundamentally more volatile than their more developed peers.
Something to remember when volatility returns in full force.
To contact the reporter on this story: Srinivasan Sivabalan in London at ssivabalan@bloomberg.net.
To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Justin Carrigan, Rita Nazareth
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