The West Bay district skyline beyond moored boats in Doha, Qatar.
As investors dump emerging-market equities at an unprecedented clip, they’re turning more and more to frontier markets in search of the next growth story.
No exchange-traded fund focused on developing nations has grown faster in the past year than BlackRock Inc. (BLK)’s iShares MSCI Frontier 100 fund, whose biggest holdings are in Kuwait and Qatar. Assets under management surged nine-fold to $594 million, fueled by $465 million of inflows and returns of 23 percent. In contrast, BlackRock and Vanguard Group Inc.’s flagship emerging-market exchange-traded funds have seen investors pull a record $26 billion in the period, according to data compiled by Bloomberg. The MSCI BRIC Index is down 4 percent this quarter, even as it is poised for its best week of gains this week.
While Brazil, Russia, India and China led the global economy out of the 2008 financial crisis, investors have been fleeing the biggest developing nations as their growth sputters. The Hang Seng China Enterprises Index is in a bear market, Brazil suffered its first credit-rating cut in a decade, and Russia is facing international sanctions for its Crimea takeover. Stocks are rallying, meanwhile, in places like Kenya, where oil discoveries are stoking growth, and Vietnam.
“Everybody is looking for the next China,” Jim Russell, who helps oversee $115 billion for U.S. Bank Wealth Management, said in an interview at Bloomberg’s headquarters in New York. “We think Africa is probably one of the areas. Where’s the growth geographically? It’s got to be in the frontier markets.”
Stocks tripleChinese growthMiddleEast
Investors have moved $81.2 million into U.S.-based emerging market equity exchange-traded funds over the last five days, cutting outflows for the past year to $21.6 billion, according to data compiled by Bloomberg. BlackRock’s flagship emerging market ETF, the world’s second-largest by assets, added $144 million on March 26, its first day of inflows since October. MSCI’s BRIC Index has gained 5.5 percent this week, while the Ibovespa has climbed 5.7 percent.
“For several years we had been relatively bearish on emerging markets in general and Turkey in particular, but in the last few months we have turned more bullish,” Sam Vecht, London-based manager at BlackRock Emerging Europe Trust Plc, said in e-mailed comments March 17. Investors getting out of emerging markets now risk repeating the mistakes of 2009 to 2011, when many were too late to share in the biggest gains, he said.
Kuwait, QatarPolitical instability
“Frontier markets do behave differently from emerging markets,” Wickham said in an interview at the bank’s offices in New York. “It does give you nice diversification benefits because you do have low cross-country correlations.”
MSCI, the New York-based provider of stock market indexes, says markets classified as frontier need to be accessible to foreign investors and in countries not going through extreme economic and political instability. Frontier markets are a subset of emerging markets, and in general tend to have more relaxed liquidity and market-cap requirements, MSCI says.
HSBC, which manages $650 million of frontier-market assets, is overweight the Middle East and also favors Pakistan and Vietnam, Wickham said. The London-based bank has been reducing its stake in Nigeria and Kenya.
Vietnam’s Ho Chi Minh Stock Index (VNINDEX) has soared 18 percent this year as economists forecast growth will reach 5.6 percent in 2014 and quicken to 5.85 percent next year. Exports jumped 12.3 percent in the first two months of the year from the same period in 2013 as higher costs and wages in China prompt companies to set up manufacturing elsewhere in Asia.
Lower volatilityBloomberg
BRIC bust fuels investor rush into frontier-market ETFs Related image(s)
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