Search for Higher Returns Boosts Interest in Frontier Markets
Interest in “frontier” markets in emerging economies is increasing as investors chase higher returns at a time of slowing growth in the more developed world, according to a new report from Standard and Poor’s.
The economic growth happening in most emerging markets, whether large or small, signals a paradigm shift in the world economic order, says Alka Banarjee of Standard & Poor’s Index Analysis and Management Group.
“Growth in developed countries has plateaued at around 2% to 3%. And in the last year, the fallout from the subprime crisis and rising commodity prices have led to predictions of stagnant growth in developed markets. In contrast, economists predict average emerging market growth to be a healthy 6%, and some countries like China, Vietnam, and India may grow in excess of 8%. Though there is no clear correlation between economic growth and stock market performance, investors don’t want to miss partaking in the growth of these countries and have rushed in to benefit.”
Several countries like those in the Gulf Cooperation Council (GCC) or in the African markets have experienced strong commodity-driven growth related to the rise in commodity prices. Others are experiencing more service- or manufacturing-driven growth.
Across the board, foreign investors seem keen to reap the rewards of emerging market growth.
The definition of “frontier market” has expanded to include all markets that aren’t part of the traditional pool of emerging markets in the S&P/IFCI index. As stock markets have boomed, the frontier markets’ size of total market capitalization has come to vary from in excess of $100 billion to less than a billion dollars.
During the last seven years, investors have grown more comfortable with frontier markets, $&P says.
The average pool of emerging markets allocation in global portfolios has increased to a robust 10% to 12%, from 5%, and is still growing.
Perceptions about frontier markets are also changing. Once exotic, risky investments, now they are must-have portfolio allocations, and this attitude is slowly making frontier market investing appear less risky.
The S&P/IFCG Frontier Composite index has risen 34.8% on an annualized basis in the last five years, growth matching that of the S&P/IFCI index.
The report Equity Viewpoint: The Allure Of High Returns Continues To Lead More Investors Into Frontier Markets analyzes a number of frontier markets: Botswana, Kenya, Mauritius, Nigeria, Bangladesh, Kazakhstan, Pakistan, Vietnam, Croatia, Estonia, Romania, Slovenia, Kuwait, Qatar, UAE.
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