HOW TO PLAY IT-Frontier markets lure investors chasing yield

Mon Oct 7, 2013 12:26pm EDT
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Andrea Hopkins

Oct 7 (Reuters) - After a year of mediocre returns from emerging markets, many investors are searching for yield in so-called frontier markets in hopes that low prices and potential growth will outweigh the risks in little-developed lands.

Often viewed as tomorrow's tigers, nations like Nigeria, Qatar, Bangladesh or Colombia have drawn interest from asset managers looking for well-managed companies serving a growing middle class - a combination with strong potential for profit.

"It really is one of the most interesting asset classes," said Gavin Graham, chief strategy officer at INTEGRIS Pension Management Corp in Toronto. "There are very few markets left that are not correlated to major asset classes. With rates having gone so low, everything moves in one direction. Frontier markets don't."

Graham said every investor who owns international equities should look at boosting exposure to frontier markets, especially since aging emerging market stars like China, India and Brazil have become more correlated to developed nations, nullifying their appeal as high-growth performers.

Since the start of 2012, MSCI's Frontier Market index has risen 20.1 percent, nearly triple the performance of stocks in its emerging market index, which climbed 7.0 percent.

Dividend yield is also above 4 percent, almost double the 2.5 percent for global equities, while typical price-to-earnings ratios are lower, because share prices are relatively cheap.

Frontier companies and countries are also often far less leveraged than those in the developed world, making rising global interest rates less threatening.

"Typically people have been going to emerging markets before they have looked at frontier markets, so they have really been overlooked," said David Kunselman, senior portfolio manager at Mississauga, Ontario-based Excel Funds Management, which specializes in emerging markets.   Continued...