Posted inFrontier Markets

EM mania spreads to frontier markets

Global frontier market equity funds welcomed net inflows of €227m in June, according to Morningstar data. That’s still small beer compared to the money that went into EM and European equity funds during the same month, but it’s the largest monthly injection into the asset class since November 2013.

And €227m is a significant amount of money for frontier markets, whose total market cap is just $144bn, compared to $4.93trn for the MSCI Emerging Markets index. But is this renewed interest (see chart below) heralding a new dawn for the asset class, which was hit hard by the commodity crash that started in summer 2014?

That remains to be seen, as most of the largest frontier market economies remain highly dependent on commodity exports. This has only become more so since the recent upgrade of Pakistan to emerging market status.

Frontier markets have also significantly underperformed emerging markets this year, with frontier funds also lagging behind. Even though all frontier market equity funds have significant exposure to countries currently classified as emerging markets, which supposedly should have helped their performance, the bulk of these funds still haven’t managed to even outperform the MSCI Frontier Markets Index year-to-date.

Though frontier market flows have started to play catch-up with their EM equivalents, the latter asset class remains markedly more popular for now. According to Expert Investor data, the share of fund buyers intending to increase allocation to frontier market equities has risen steadily this year, but it is still below the equivalent for EM equities in most European countries. And four in 10 European investors don’t even invest in frontier market equities at all.                  

Part of the Bonhill Group.