GRAPHIC-After solid gains, frontier markets starting to crack

LONDON Tue Feb 25, 2014 7:35am EST

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LONDON Feb 25 (Reuters) - Frontier stock, currency and bond markets, which were among last year's most favoured assets, are starting to show cracks as capital flight out of developing economies accelerates.

Frontier stocks are still outperforming broader emerging and developed markets, with Ukraine rallying to the top of the league table after the installation of a pro-Western interim leadership there, the following graphics show:

But there are also noticeable laggards among the frontier economies - those which are at an earlier stage of development than established emerging markets. Nigerian stocks , a star player last year, are at the foot of the frontier league table, dropping 18 percent so far in 2014.

The suspension of central bank governor Lamido Sanusi has unnerved investors before elections next year.

Currencies are also starting to feel the strain, according to this graphic:

Many frontier currencies are pegged or managed in a narrow band and their central banks have preserved them from the worst of the emerging market storm which has hit freely-floating currencies such as the Turkish lira and the South African rand since last May.

But reserves are dwindling and exporters are looking to remain competitive. This year frontier central banks from Ghana to Nigeria and Kazakhstan have devalued currencies, moved them out of their bands or let them fall to record lows.

Frontier debt markets which delivered gains of 5 percent in 2013, are muted this year. Returns on JPMorgan's NEXGEM index of sovereign dollar debt from frontier economies are just above flat, on a par with the broader emerging bond index.

Citi's equity sales team said the cracks may deepen.

"The newsflow has been messy, currencies have turned volatile, valuations are richer than they used to be ... and with lots of fresh money having hit the asset class over the past year, a proper pullback looks due about ... now," they said.

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