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ETF Specialist

Frontier Markets Haven't Been Immune

The risks of frontier markets become more visible in a persistent slow global growth environment.

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Frontier markets were enjoying their moment in 2014. Relatively risk-tolerant investors were beginning to notice this very tiny area of the market, thanks to the strong outperformance of frontier-markets funds, relative to emerging-markets funds, over the prior two years. By the end of 2014, there were 15 broad frontier-markets funds, nine of which were launched in 2012 or after.

But 2015 has been a rough year for this group of funds. For the year to date, the five largest broad frontier-markets funds have been underperforming the MSCI Emerging Markets Index by an average of 400 basis points. Historically, individual frontier-markets countries have high idiosyncratic risks, but when investments from these countries are combined into a geographically diversified portfolio, this can result in some risk mitigation. (This is relative to a diversified emerging-markets fund, where individual emerging-markets countries have been growing more correlated over the past few years.) However, many of the large frontier markets, such as Nigeria, Kenya, Kuwait, and Argentina, all saw their respective stock markets, and currencies, exhibit sharp declines in 2015. There are a number of reasons for these declines, including weak global demand for these countries’ exports, political instability, and terrorism. These issues have weighed on these countries’ public finances, stock markets, and currencies. Frontier markets are defined by their underdeveloped institutions, inchoate financial systems, weak rule of law, and fairly illiquid capital markets. So in other words, no matter what anyone says, frontier-markets investing continues to be very risky.

Patricia Oey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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