(Bloomberg) -- Investors searching for diversification may want to consider, of all things, frontier currencies.
Most of frontier currencies’ volatility is idiosyncratic and less dependent on “global factors” than that of emerging ones, London-based Goldman Sachs analyst Mark Ozerov wrote in a note Monday. As such, and given their higher yields, “frontier currencies could indeed provide diversification benefits to global portfolios,” he said.
- Major asset classes explain only a small portion of FM FX total returns:
But there are some important qualifiers. Goldman reckons that over long horizons the returns from frontier and emerging currencies look more similar -- for instance, they both suffered in 2014-15 and both rallied in the following two years.
Frontier currencies also tend to be more volatile than their emerging cousins and often suffer from being less liquid and more heavily controlled by central banks, meaning that “despite relatively moderate ‘measured’ exposure to global risk factors, there is always a risk of a non-linearity in reaction to a sharp spike in global risk aversion,” said Ozerov.
- Despite the FM FX idiosyncrasy on a monthly basis, over longer horizons FM and EM cycles tend to be more synchronized:
©2018 Bloomberg L.P.