Struggling to find solace from the threat of Trump? Thanks to their largely domestic shareholder base, frontier markets could provide an unlikely haven from the expected volatility.
President-elect Donald Trump has been vocal about his protectionist plans for the US economy, and his aim to shake up trade deals with the rest of the world. Just this week, Trump caused controversy when he described the dollar as “too strong” in an interview with the Wall Street Journal.
Frontier markets should show a degree of resiliency during this period of increased uncertainty, given their limited economic links to the rest of the world, said Sam Vecht, co-manager of the Bronze Rated BlackRock Frontiers Trust (BRFI).
“When you look at the MSCI frontier market index now, it has very low correlation to the MSCI emerging markets or the MSCI world, which explains why even when people are worried about Trump, Brexit or linkage to different issues, frontier markets continue to run in an unique way,” said Vecht.
The low correlation between frontier markets and rest of the world equities is due to the reduced international investment in frontier counties compared to emerging markets, added Vecht’s co-manager Emily Fletcher.
“The amount of foreign cash invested in frontier economies is so much smaller; we do not see that type daily fluctuations,” said Fletcher.
However, Fletcher added that it was impossible to say any country in the world is immune to what is happening in the wider world.
“There are some more open economies in frontier markets, like Vietnam, where their trades are driven by external economies,” said Fletcher. “And then there are some which are more protective and remain closed-off.”
Despite some individual frontiers having volatile stock markets, as a whole frontier economies are a low volatility investment since the individual countries are not correlated to one another. Fundamentally frontier markets as a whole have low volatility relative to other markets in the world as well.
Data provided by BlackRock showed to the end of December 2016, the volatility of weekly returns since December 2010 in the BlackRock Frontiers Investment Trust was 1.5% while the FTSE All-Share, S&P 500 and MSCI Emerging Markets index had 2.3%, 1.9% and 2.5% volatility respectively. This is due to the large volume of daily flows.
Where are the Growth Opportunities?
Looking at specific countries, Argentina and Bangladesh present a compelling combination of the fastest growing economies, the best demographic profiles, the lowest government debt and a substantial commodity endowment, said Vecht. The trust currently has 12.2% invested in Argentina, the largest exposure within the portfolio, followed by Romania and Pakistan.
“It is possible to find companies with strong cash flows and high dividend yields in frontier markets, on some of the lowest valuations in the world,” said Vecht.
The trust has 30% invested in the financial sector, but Vecht explained this level of was a very diverse group of financials investing in very different frontier markets. He sees opportunities in banking stocks in Bangladesh as the country has a lot of active investment in the local stock market, while other frontiers have far less domestic activities. The BlackRock Frontiers Investment Trust is trading at a 0.7% premium. The fund gained 31.4% in 2016 and it has a 17.9% five-year annualised return.
