Frontier markets haven’t performed in lock step with the more developed emerging world. Over the past year, frontier markets, as measured by the MSCI Frontier Markets Index, have delivered a stellar return of 21%, as compared with a loss of 5% for broad emerging markets. Why the difference? Since the Federal Reserve first hinted at a taper last May, emerging market stocks have suffered a steep sell-off on the back of capital outflows and growth concerns. By contrast, frontier markets have been relatively insulated from bouts of capital flight thanks to their robust growth, still low level of foreign ownership and pegged currencies.
Market Realist – According to reports from Bank of America Merrill Lynch, frontier markets saw inflows of almost $1.5 billion up to March 31, 2014. Meanwhile, emerging markets (EEM) saw outflows of $2.1 billion in the same period.
Emerging markets like India (EPI), China (FXI), and Brazil (EWZ) experienced tough market sentiments in the first half of the year. Frontier markets, on the other hand, have done extremely well. The above graph compares the price performance of the iShares MSCI Emerging Markets Index Fund with the iShares MSCI frontier markets index fund (FM).
Frontier markets have yielded better returns than emerging markets this year. Frontier markets have yielded year-to-date returns of about 18.34%, while developed markets (VEA) have yielded returns of 2.57% and emerging markets have yielded returns of 7.48%.
Read on to the next part of this series to learn more about the diversification benefits of frontier markets.