| LONDON, June 2
LONDON, June 2 A flagship index of frontier
market stocks is likely to struggle to match its previous strong
performance after the promotion of its two top scorers, Qatar
and the United Arab Emirates.
Youthful populations, high economic growth rates and an
expanding middle class have drawn investors to frontier markets
in recent years, leading them to significantly outgun emerging
and developed markets in terms of returns.
Though smaller and less accessible, these rapidly-changing
frontier markets exhibit the characteristics that many bigger
emerging markets had a decade or more ago, before growth in
economies such as Brazil, Russia, India and China started to
become more sluggish.
MSCI's frontier markets index has returned
21 percent this year in dollar terms, compared with 3.5 percent
in emerging markets and 4.6 percent for developed
But a large part of those frontier gains were driven by
Qatar and the UAE, each of which has delivered 30-40 percent
returns this year. The outperformance is partly due to a
recovery in Dubai and strong government spending, but also in
anticipation of their well-flagged upgrade to emerging market
status this week.
But as they start their new careers as emerging markets, the
frontier index will be dominated by two markets - Kuwait and
Nigeria - which together will make up 45 percent of the index.
These markets, and the new skew of the index, may not appeal
as much to investors.
"Kuwait is hardly a pre-emergent consumer economy with
plenty of upside," said Daniel Broby, a veteran frontier market
investor and chief executive of Gemfonds.
"Its weight, a function of listed financials and lack of
stock markets in other frontier markets, is the bane of the
Kuwait has returned 15 percent this year in dollar terms,
but that is partly down to a steady currency.
Nigeria, struggling with a weak currency and beset by
political risk over upcoming elections and the abduction of over
200 schoolgirls by Islamist group Boko Haram, is flat in dollar
High-yielding Nigeria is considered a risky play, while
highly-rated Kuwait is seen as a relatively safe frontier
investment. Investing in both countries at once therefore
doesn't make much sense, analysts say.
Despite the attention given to frontier markets, analysts
see only around $20 billion following this sector, compared with
more than $1 trillion for emerging markets.
Frontier investing tends to be the preserve of specialist
investors, with passive money - which mirrors the performance of
an index - making up less than $1 billion, compared with
estimates of around $300 billion for emerging markets.
The index is closely-watched by strategists as a barometer
of frontier market sentiment, but the lack of dedicated money
following it may limit the impact of the changes.
"Anyone who invests in frontier markets using
benchmark-based products is unlikely to fare as well as they
would investing in funds managed by dedicated and experienced
stockpickers," said John-Paul Smith, head of emerging equity
strategy at Deutsche Bank.
Promotion to a higher index has often led to
underperformance, as the promoted markets have already risen
ahead of promotion, and tend to be small and easily ignored in
their new home.
Investors expect a similar fate to befall Qatar and the UAE.
But this does mean that those countries which now have a
higher weighting in the frontier index may draw in more of those
Nigerian stocks rallied 3 percent on Friday
ahead of the rejig and rose again on Monday to hit four-month
highs. Nigeria now makes up 19 percent of the index, up from 12
percent before the changes.
"It puts Nigeria out there and it's positive for the
market," said Akinbamidele Akintola, vice president, Africa
equity sales at Renaissance Capital, who said there had been
increased interest from foreign investors.
Stocks in Kuwait - which will make up 26 percent of
the index, compared with 18 percent before - and Morocco
, at 6 percent from 4 percent, also rose at the end of
"I'm still reasonably upbeat on the 'new Frontier Markets',"
said Andrew Howell in emerging equity sales at Citi, in a client
note. "Frankly, I like the index a lot more without UAE and
Qatar, and if only you could somehow get Kuwait out of there, it
would become a pretty good proxy for some the world's most
dynamic, fast-growing and potentially explosive developing
(Additional reporting by Sujata Rao in London and Chijioke
Ohuocha in Lagos; Editing by Toby Chopra)