Chart of the Week - Frontier Market equities are cheap
Frontier Markets is one of those obscure corners of Global Equities that often gets overlooked. There’s not much data and research on them, perceptions often see them as risky —not worth bothering with when you can just get emerging markets, and performance post-2008 has been fairly uninspiring.
Firstly, what is it? I am referencing the MSCI Frontier Markets Index — basically it’s the next tier down from emerging markets (while developed markets is the next tier up). They tend to be smaller, less liquid, less developed stockmarkets vs those in Emerging Markets, but are still otherwise investable. See: MSCI country classifications.
The country membership in this index is a bit of a revolving door — the best ones tend to get promoted to emerging markets, and then the worst emerging markets are often demoted to frontier. But you also get some countries kicked out of frontier altogether into standalone status if geopolitics or capital market/FX issues make them uninvestable.
That said, it tends to be a very diverse set of countries …literally on the frontier of where investors usually hunt for opportunities. The current list covers Asia (Bangladesh, Pakistan, Sri Lanka, Vietnam), Middle East (Jordan, Oman, Bahrain), Eastern Europe (Croatia, Estonia, Iceland, Kazakhstan, Latvia, Lithuania, Romania, Serbia, Slovenia), and a dozen African nations.
And the data reflects this; Frontier Markets have historically had a lower correlation to developed markets than Emerging Markets, and lower historical volatility. So rather than adding risk, Frontier equities actually add diversification.
Meanwhile as a group, Frontier Market countries have superior demographics, and are set to see significantly higher population growth vs the rest of global equities (underpinning growth/earnings), this along with cheap valuations positions them well in terms of longer-term return expectations.
And that brings us to this week’s chart from the latest Weekly Insights report (and covered in more detail in the Weekly Macro Themes chart pack).
Frontier market equities are currently showing up as cheap (and the indicator has turned up from previous extreme cheap — a bullish cyclical sign). Breadth and technicals have also been on an improving path, but the key from here in completing the bottoming process will be to break through current overhead resistance and make new post-2022 bear market highs (and there are potential catalysts, as noted in the report).
So it’s an interesting corner of the market, with interesting strategic features, and increasingly interesting tactical features…
Key point: Frontier Market equities are cheap and appear to be in the later stages of establishing a new cyclical bull market.
https://entrylevel.topdowncharts.com/p/chart-of-the-week-frontier-markets
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