Frontier Markets Are Worth Exploring
Several regions look promising as the headwinds abate

March 2019, London. Emerging market (EM) funds are set to make a return, now that the strong headwinds have abated. So says the latest issue of The Cerulli Edge―European Monthly Product Trends.

After 12 torrid months—the MSCI Frontier Markets Index was down 15% in US dollar terms as at the end of February 2019 compared to the MSCI World Index’s 1% gain—investors in frontier markets are able to breathe a sigh of relief.

Frontier markets have been far less rewarding for investors than their emerging counterparts, notes Cerulli Associates, a global research and consulting firm. In the past 10 years, the frontier markets index has delivered an annualized return of 8.6%, compared to 10.7% for EM and 13.7% for the MSCI World Index.

However, several of the headwinds that have hampered frontier markets have eased. “The US Federal Reserve appears less likely to tighten policy further, the threat of trade disputes appears to have diminished, and China has put in place measures to stimulate its economy,” says André Schnurrenberger, managing director, Europe at Cerulli Associates. “Together these factors may be constructive for frontier markets in the near term.”

Cerulli says several regions appear favorable for investors at present. In the Middle East and North Africa, fiscal reforms, rising corporate earnings, improving valuations, and higher inflows of foreign capital should stand the region in good stead. Similarly, several catalysts such as population growth, rising incomes, and urbanization are benefiting a number of Asian markets, including Vietnam.

Other Findings:

  • Global currency bonds recovered in January, after suffering net outflows of €1.2 billion (US$1.3 billion) the previous month and €5.5 billion in 2018 as a whole. European equities continue to post net outflows, although some European managers have indicated that they anticipate demand for these strategies in 2019. Cerulli says that EM bonds and equities appear to be back in favor with investors, after seeing net outflows of €4.2 billion during the final quarter of 2018. “With growth in developed markets slowing as emerging market gross domestic product growth improves, EM look attractive on a relative basis,” says Schnurrenberger.
  • The cross-border market posted net outflows during January, largely due to outflows from money market funds (-€16.7 billion) and equity funds (-€3.6 billion), says Cerulli. Although equity funds are following the trend established in the latter part of 2018, money market funds are doing the opposite, having posted net inflows of €30.2 billion in December 2018. Bonds funds were the month's bestsellers cross-border, with €8.8 billion of net inflows, reversing the trend of the past five months, which saw total net outflows of €65 billion.

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