The iShares MSCI Frontier 100 ETF (NYSEArca:FM) is up nearly 15% and economic data support more upside for frontier markets as 2017 moves into the second half.
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.
“FM economies, like emerging markets more generally, suffered significant macroeconomic pressures in the wake of the 2014 and 2015 commodity price collapse. GDP growth in FM economies averaged around 3% in 2016 (weighted by 2015 GDP in USD terms), down from 4% in 2015. The slowdown was driven mainly by Nigeria, Angola and Ecuador. FM growth has slowed continuously over the last three years from a rate of 5% recorded in 2013. This is partly explained by the knock-on effects of weaker commodity prices on domestic income and spending,” according to a recent note from Fitch Ratings.
Moreover, 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.
Due to their more isolated nature, frontier markets can be more volatile, but the isolation offers a degree of resiliency in periods of increased global uncertainty, which may further help these economies dodge the storm from President Donald Trump’s protectionist policies in the U.S.
“However, the latest data also show trade growth picking up across most countries. Three-quarters of FM countries are currently seeing faster growth in exports or imports compared with a year ago. The pick-up in exports in Asian FMs, including Mongolia and Vietnam, is particularly pronounced. This is consistent with the pick-up in world trade recently highlighted in Fitch’s June 2017 Global Economic Outlook,” according to Fitch.
Argentina is FM’s largest country weight at over 19%. That country was close to earning the emerging markets upgrade in the recent MSCI market classification, but was rebuffed. Pakistan is moving to the emerging markets index. That country is currently about 5.8% of FM’s weight and will eventually not be part of the ETF.
Kuwait and Vietnam combine for over 29% of FM’s weight.