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Frontier market picks amid a global EM sell-off

Frontier market picks amid a global EM sell-off

Some analysts have identified frontier market opportunities for foreign investors even as global sentiment nosedives on developments in Argentina and Turkey.

The Institute of International Finance (IIF), for instance, is expecting a strong rebound in capital flows to Qatar to lift the broader frontier market universe.

The industry body estimates non-resident capital inflows - including equity and debt instruments that transfer financial asset ownership - into Qatar to reach $20 billion this year, driven by an increase in deposits and bank loans.

This will lift non-resident capital flows to frontier markets to over $145 billion in 2018, IIF economist Celso Nozema, analyst Fiona Nguyen and director Emre Tiftik stated in a report.

However, the authors were not optimistic about portfolio flows, covering securities such as stocks and bonds, into the frontier markets.

They estimate non-resident portfolio debt flows to decline from an all-time high of $30 billion in 2017 to $20 billion in 2018. They also project foreign investor flows into equities to decline by $1 billion to $3.5 billion in 2018.

Frontier markets have been big casualties of the latest trends in global markets, with the MSCI Frontier Market index down 12.6% year-to-date.

Not only have these markets been hit by a stronger US dollar and central bank liquidity drying up, they are also suffering from rising debt levels and geopolitical tensions.

‘The most immediate risk relates to U.S.-China trade tensions given the strong trading links between China and many frontier economies,’ the authors wrote.

In a separate study, however, the IIF noted that Qatar, Kazakhstan, Serbia, Croatia and Kuwait were less vulnerable to global developments.

Ideas for Asia

Investors in Asian frontier markets are more sanguine.

Thomas Hugger, portfolio manager of the AFC Asia Frontier Fund USD, saw a positive performance of 0.7% in August, though the fund’s year-to-date performance is down 12.2%.

Explaining the numbers, Hugger said that the political and economic outcomes of Argentina and Turkey are not linked to the fundamentals of Asian frontier markets.

‘Asian frontier markets continue to remain a structural growth story driven by favourable demographics, improving infrastructure, increasing urbanisation, rising income levels, greater consumerism and structural changes such as manufacturing jobs moving to Bangladesh, Cambodia and Vietnam,’ he wrote in an investment newsletter.

Hugger also noted that valuations and company fundamentals remain attractive, stating that his fund’s trailing 12-month price-to-earnings ratio is now at 13.24x, reflecting the value of the underlying stocks in the fund’s portfolio.

The fund’s performance was led by its biggest country allocations, Vietnam (25%) and Bangladesh (18.7%), where markets have rebounded.

The fund also added to existing positions in Kyrgyzstan, Mongolia and Vietnam last month, and initiated investments in Uzbekistan for the first time in the fund’s history, targeting the financial, industrial and materials sectors.

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