Frontier markets have the potential to benefit investors, despite geopolitical fears, according to Baring Asset Management.
Frontier markets have a lower correlation to developed markets than emerging markets, said Michael Levy, investment manager of the Baring Frontier Markets Fund. He added that this meant local factors are more important to frontier markets than global macro-economic and political developments. In addition, the fall in the price of oil could be a positive for many frontier markets. “The combination of a supportive economic environment and lower energy costs should be positive for companies in countries such as Sri Lanka, Bangladesh and Kenya,” he commented.
For oil exporters, such as Saudi Arabia, the government has committed to maintaining spending in education and healthcare, despite the oil price fall, which has reassured markets, Levy said. He went on to say that stock selection and diversification will be important for investors. “The companies which are likely to deliver the most attractive long-term returns are well-managed, high-quality companies where we see potential for strong earnings growth for multiple years,” he commented.
As a final point, Levy said that frontier markets are now attractively priced compared to emerging markets; the MSCI Frontier Markets Index now offers more than twice the return on equity of the MSCI Emerging Markets Index for a lower price-earnings ratio.