LONDON Jan 17 Tiny stock markets in countries
such as Vietnam and Bulgaria are leaving their bigger emerging
and developed peers behind, racing to multi-year or record
peaks and hinting at another year of heady gains for frontier
MSCI's frontier index is up almost 3
percent already in 2014, contrasting with losses on the bigger
emerging index which are feeling the chill from the
U.S. stimulus wind-down.
It also outstrips developed markets, which
are flat so far in 2014, with investors seemingly reluctant to
take last year's record-breaking rally any further for now.
Twenty of the 26 markets in the frontier index that groups
non-mainstream bourses are in positive territory. That makes the
index the top performer so far in this admittedly short year-to
date, after gold. Some markets - in Vietnam, Lebanon, Pakistan
and Bulgaria - have already gained 5-11 percent.
A series of country-specific factors such as privatisations,
the repricing of political risk premium and local buying are
supporting these markets and insulating them from tapering and
an eventual end of money printing in the West.
"Frontier markets have positive local factor stories coming
out. They are immune to tapering. They have a lot of
country-specific, idiosyncratic factors," said Salman Ahmed,
global strategist at Lombard Odier Investment Managers.
Ahmed cited the example of Pakistan, where a peaceful
general election in May allowed Prime Minister Nawaz Sharif to
form a stable government and implement reforms. "If people start
to price in political risk and nothing happens, that political
risk needs to be adjusted down," he said.
Karachi stocks hit record highs on Friday and the
country's 2017 government bond also scored to
all-time peaks for a yield of 7.2 percent.
Frontier markets such as Pakistan tend to have a smaller
foreign investor component than in bigger economies such as
Turkey or Russia where more than 60 percent of what's available
can be in foreign hands.
That makes all the difference at a time when the tide of
cheap money gushing from the Federal Reserve is starting to
turn, leaving international investors with less free cash to
invest in emerging markets.
Some of these foreign investors are more likely to be
attracted to the higher-yielding assets that are less correlated
with global events. Hence, the recent success of bonds from
lesser-known first time issuers from Africa or Central America.
Frontier bonds had total returns of 5 percent last year on
one index, compared with losses for most emerging debt.
Pakistan, which is gearing up to issue its first dollar bond in
7 years, is one of the top performers there.
"In a world where you're struggling to get 3-4 percent in
key developed markets and big (emerging markets) have issues,
you can get an extra premium of 400-500 basis points without the
... the tapering drama," Ahmed said.
In Asia, where many countries are hostage to China's
economic outlook, Vietnam is defying the general negative trend
with benchmark stocks rising in 11 consecutive sessions
to the highest level since May 2010.
The market is attracting foreign investors who expect the
government will raise foreign ownership limits to 60 percent
from 49 percent in listed shares within the next few weeks.
Privatisations are also allowing many foreign investors to
grab shares at an attractive discount in blue chip companies
which are expected to report solid earnings.
Vietnam will also allow foreign investors to buy bigger
stakes in its banks from late February, as part of economic
reform programmes by the communist government.
"Vietnam has a unique combination of factors," Juerg
Vontobel, Zurich-based founder of London-listed investment firm
"Markets are primarily driven by domestic investors. (But)
foreign investments have been coming in and Vietnam is a huge
benefiary of multinationals' investment."
It may depend on how money is invested, however. Vontobel
said two Vietnam exchange-traded funds - which are like stocks
but based on holdings of a particular bourse - underperformed
the country's VN index by around 10 percent last year.
"ETFs cannot replicate the index and they have to buy when
they get new money and sell when they lose money. They have less
flexibility," Vontobel said.