Frontier Stocks Look Inexpensive, Could Get Some Help From Fed

The iShares MSCI Frontier 100 ETF (NYSEArca: FM) is up more than 16% year-to-date and is outperforming broader emerging markets exchange traded funds. FM could keep moving higher, particularly is the U.S. dollar weakens and the Federal Reserve lowers interest rates.

Frontier markets include those less advanced capital markets from the developing world with an investable stock market that is less established than those in the emerging markets. Consequently, frontier market stocks are consider much riskier than other global markets and are not for the faint of heart.

Frontier markets are not as connected to each other as emerging and developed markets, which are more closely tied to the global economy – the MSCI Frontier Market Index has exhibited a low correlation to both the MSCI Emerging Markets Index and the MSCI World Index.

“The case for frontier markets typically goes like this: Countries such as Sri Lanka, Argentina, and Vietnam resemble today’s emerging markets 20 years ago, with large populations moving up the economic ladder and potential for political and economic reforms that could bolster economic growth,” reports Reshema Kapadia for Barron’s.

Appeal Of FM ETF

Data indicate FM is attractively valued relative to emerging markets benchmarks.

“At 12.5 times next year’s earnings, frontier markets are still cheaper than emerging markets. Yet frontier market stock funds suffered outflows of $2.3 billion, according to EPFR Global, in the 12 months ended June 30,” according to Barron’s.

FM, home to nearly $517 million in assets under management, holds 128 stocks. Kuwait and Vietnam combine for over 41% of the fund’s weight. It is important to note that FM’s weight to Argentina is declining because that country is being added to the MSCI Emerging Markets Index.

“Vietnam has made news as companies diversify their supply chains away from China. But fund managers say the trade war isn’t a game changer, as Asian companies have been moving production to the country for years to capitalize on labor costs that can be as much as half that in China. Indeed, President Donald Trump suggested late last month Vietnam could be his next tariff target. Another concern: If the trade war pushes China to devalue its currency, exporters like Vietnam would have to follow to stay competitive,” according to Barron’s.

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