Diversification Benefits of Frontier Markets

As reported by The International Herald Tribune, “frontier” markets are gaining even more interest than before in light of the recent turmoil in more developed markets.  As the article notes, what has started to come home to investors is that frontier markets, which are remarkably diverse, have achieved these good returns with low correlation to the developed markets:

“…From October 2001 to last September, the S&P IFC Global Frontier Markets index – including 20 frontier economies like the United Arab Emirates, Vietnam and Nigeria – rose 553 percent, surpassing even the healthy 430 percent gain by the benchmark for emerging markets, the MSCI Emerging Market index for the same period.

…For the month of January, as markets from the Dow Jones industrial average to the CAC 40 sank, the IFC frontier index slipped just 2.8 percent.

One reason for the appeal is the documented lack of correlation with developed and emerging markets.

…For those who invest across the range of frontier markets, volatility is reduced because the frontier category is extremely diverse. Members differ widely from one another in the stages of economic development, size of the economy and population, political stability and corporate governance, resulting in widely different performance and valuation. By contrast, the mainstream emerging markets mostly are politically stable and have attained certain levels of legal and regulatory structures necessary to run markets.

“There are huge diversification benefits to frontier markets,” said Moody of Progressive Asset Management. The IFC index contains 20 frontier markets, and “the range of performance in any given year is quite significant,” he said. “In 2004, Ukraine was up something like 170 percent. The worst market was Kenya, which was down little over 10 percent. In 2005, the best market was Lebanon, which was up 110 percent up. Ghana was your worst market, which was down 30 percent, and so on….”

This entry was posted on Friday, February 8th, 2008 at 2:19 pm and is filed under Nigeria, UAE, Vietnam.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.