Nigeria, frontier markets climb $700bn in value, set to outpace emerging market stocks

Market and policy reforms in Nigeria, Argentina, and Kuwait are setting the tone for investors’ interest in frontier markets whose combined market value exceeded $700 billion in 2017 for the first time in a decade, according to Bloomberg reports.

Although the emerging markets are still capturing much of the attention, the frontier group has begun to outpace emerging-market stocks after three years of underperformance.

A wave of reforms sweeping across smaller developing economies categorized as the frontier markets including the overhaul of inefficient tax systems in Argentina’s, privatization drive in Vietnam and currency liberalization in Nigeria and Morocco are encouraging investors to pay a higher price to own those countries’ stocks.

“People are returning to frontier markets quite enthusiastically,” Tony Hann, the head of equities at Blackfriars Asset Management Ltd. in London told Bloomberg.

“Strengthening oil prices may be one broad theme, but otherwise, there are specific elements like currency reforms that are driving specific markets.”

A frontier market is a type of developing country which is more developed than the least developing countries, but too small to be generally considered an emerging market. The term is an economic term, which was coined by International Finance Corporation’s Farida Khambata in 1992.

The MSCI Frontier Markets Index trades at 13.2 times the 12-month estimated profits of its member companies, the richest valuation on record, data compiled by Bloomberg show. It’s also the priciest level since June 2014 compared with emerging-market equities. The frontier gauge headed for a fifth weekly gain on Friday.

Unlike Pakistan, which became a small fish in a big pond last year with its promotion to emerging market by MSCI Inc., Argentina’s failure to get the upgrade has worked in its favor. The $125 billion market accounts for 23 percent of the frontier-markets gauge, the biggest weight.

The benchmark Merval Index has jumped 56 percent since the MSCI rejection in June as the government makes policy tweaks to support growth and investment.

Regulators have approved the short selling of stocks, a move that may improve Argentina’s chances of getting that elusive MSCI upgrade.

The country’s Congress has approved a plan to reduce corporate taxes by 10 percentage points over a decade, which combined with sales-tax concessions, may reduce the tax burden by four percent of the gross domestic product.

The Argentine central bank equally raised its inflation target to support the economic recovery as loan growth is seen accelerating to 42 percent this year.

Credit growth and bank profits are becoming a recurring theme in frontier markets. In Kuwait, bank stocks are heading for the biggest monthly gain in a year as investors wager they’re the best-placed among regional peers to benefit from global interest-rate normalization.

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In Nigeria, the world’s best-performing stock market this year, tier-2 lenders are seen as the most attractive opportunity.

From Morocco to Nigeria, policymakers are allowing pegged currencies to move more freely. This follows a shift by Kazakhstan, Argentina, and Egypt in the last couple of years that has eased the risk investors will struggle to repatriate profits.

Vietnam has been an indirect beneficiary of Pakistan’s struggle to attract investors after the MSCI graduation. The nation has a 13.7 percent weight in the frontier-market index, the third-largest presence. The Vietnam Stock Index has rallied for six consecutive years, capping a 48 percent jump in 2017. It’s already up 6.7 percent in January.

Even though there are murmurs the gains have gone too far, Hann says the country remains well placed to benefit from one of the world’s fastest growth rates. The economy is projected to expand 6.6 percent this year and 6.7 percent in 2019.

Sri Lanka is worming its way into investor consciousness, almost a decade after it emerged from a civil war. The country’s tourism potential and its appeal as a transshipment location will offer opportunities in the coming years, Hann said.