There are a number of reasons why we continue to see opportunity in frontier markets. These nascent economies―tomorrow’s emerging markets―offer long-term growth potential. They’re also one of the few asset classes that provide strategic diversification to broader equities. Nigeria represents the second-largest holding in our iShares MSCI Frontier 100 ETF (FM) Unfortunately, recently there have been some scratches in that record.
What happened in Nigeria? In addition to suffering economically from the decline in oil prices, the country has been vulnerable to speculative runs on its currency (the Naira). The central bank has been plowing foreign exchange reserves to defend the currency, a task that has become more difficult with the strengthening of the U.S. dollar. Recently, however, the central bank implemented capital controls to restrict trading, which appears to be working as the Naira has stabilized.
Frontier markets are much more than an oil play. Despite Nigeria’s large position in FM, energy represents only 12 percent of the index. More importantly, individual frontier markets generally have little correlation to each other, which reduces the likelihood of contagion. And like emerging markets, the recent sell off makes now a good time to consider investing.
Do you hear what I hear? Up next: what to expect in 2015
The world’s economies and markets have had an eventful 2014. In my next blog, I’ll share our thinking on what had the biggest impact and what to expect in the months ahead. Until then, I wish you a happy holiday season and a successful 2015.
Do you hear what I hear when it comes to emerging and frontier markets? Share your thoughts with us.
*The country weight for IEMG, which tracks the IMI index, is currently 3.05% as of 12/24/14
Heidi Richardson is a Global Investment Strategist at BlackRock, working with Chief Investment Strategist Russ Koesterich. She also leads the iThinking initiative for iShares. You can find more of her posts here.