Investors Dive Back Into Frontier Markets After April Rally

rgia06hdpzzi5x5m)8dv9mym_media_dl_1.png Bloomberg

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(Bloomberg) — Investors are piling back into some of the riskiest markets, as demand for frontier assets picks up after an initial war-driven selloff.

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The MSCI Frontier Markets Index of equities is up about 10% in dollar terms in April, its best month since 2009, outpacing gains of roughly 9% in the S&P 500. In debt markets, Pakistan raised the size of its dollar-bond sale this month, while the Democratic Republic of Congo attracted bids worth four times the $1.25 billion it raised in its debut issuance.

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Money managers including PineBridge Investments, Pictet Asset Management and East Capital Group are adding exposure after trimming risk earlier in the conflict. They are buying bonds in oil exporters such as Kazakhstan, Angola and Ecuador, and equities in Vietnam, where returns are driven more by domestic factors.

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The move follows an initial selloff, when frontier assets fell alongside broader markets. With elevated energy prices fueling inflation risks and clouding the outlook for Federal Reserve rate cuts, some investors are turning to economies seen as less tied to global swings, even as liquidity risks persist and traders lack clarity on US-Iran peace talks.

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“Investors are showing the willingness to lend but also have a cash cushion that they’re willing to deploy at the right levels,” said Anders Faergemann, head of global sovereigns and economics at PineBridge in London. He has bought Egyptian bonds, betting that the country won’t raise interest rates.

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That appetite is already showing up in returns. The JPMorgan Next Generation Markets Index, which tracks the performance of debt issued by frontier nations, has risen about 5% this month. That compares with a return of just 0.1% by US Treasuries, as of Friday. Frontier stocks also escaped the worst of the war-driven swings, with the rolling 100-day volatility on MSCI’s gauge at 15%, compared with 23% for a similar gauge for emerging markets.

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Some asset managers are adding Vietnamese stocks, while demand for debt in nations including Nigeria has picked up as high oil prices bolster their outlook. Kazakhstan, another energy exporter, has also benefited: the tenge has been the top-performing currency globally since the start of the war, and the country’s KASE equity index has risen 2% in the same period.

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“In frontier markets we are not building an investment case based on the Fed or the global environment,” said Emre Akcakmak, head of frontier markets and portfolio advisor at East Capital Group. The firm holds shares in oil exporters in Kazakhstan and Nigeria, “which are far removed from geopolitical concerns,” he said in an interview. 

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These markets also provide a hedge against the prospect of higher interest rates, according to Sergey Dergachev, head of EM corporate debt at Union Investment Privatfonds GmbH.

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“Depending on how the war progresses, and its implications on inflation trajectory in developed markets, it might lead to some upward pressure for US and bund rates in short- and medium-term,” he said. “Frontier markets usually provide a good shield against gradually higher interest rates.”