Emerging markets equities and exchange traded funds are rebounding this year, but some investors may be wondering when frontier markets equivalents, such as the iShares MSCI Frontier 100 ETF (NYSEArca: FM), will start participating.
Up about 4% over the past month, FM could be showing signs of more upside to come. A weaker dollar and a Federal Reserve that appears increasingly patient regarding interest rate hikes are bolstering the case for emerging markets.
A weaker dollar also makes it easier for developing economies to service debt, which many governments have denominated in U.S. dollars. Moreover, a depreciating greenback has helped support prices for raw materials, such as oil and metals, which are among some large exports of many developing countries.
[related_stories]Argentina, one of FM’s largest country weights, is helping steady the frontier markets ETF.
The Global X MSCI Argentina ETF (NYSEArca: ARGT) is one of this year’s best-performing single-country ETFs as market observers seem inclined to wager that Argentina’s newly elected Mauricio Macri could mean big changes in the economy after years of tepid growth. The pro-market Macri has pledged to quickly reverse much of the previous heavy-handed economic policies and open up the economy that has been posting back-to-back years of near stagnate growth, Bloomberg reports.
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Some market observers are concerned that Argentina’s economy could be pinched as the new president implements tough measures, such as cuts to the budget and devaluation of the peso, that could further weigh on consumers. Oxford Economics projects gross domestic product could contract over the next two years before returning to growth of more than 5% by 2019.
“The global search for yield means that we expect frontier market (FM) bonds and equities to do well in the next few months. That being said, some FM bond markets seem to be fully valued and there is the chance of currency depreciation. While FM equities have outperformed their emerging market (EM) counterparts since 2013, they trade at a discount to EMs on a forward P/E basis … conditions are increasingly supportive for frontier debt and equity markets, though fairly strong real-effective exchange rates pose a risk,” according to a note by Strategy-Pavillion Global Markets posted by Dimitra DeFotis of Barron’s.
Related: Brazil ETFs Roar Back as Government Incompetence Ends
Oil prices also loom large for FM as OPEC members Kuwait and Nigeria combine for over 29% of the ETF’s geographic weight.
iShares MSCI Frontier 100 ETF
