Half of 2015 is now in the books so we took a look at how frontier market equities across the world have fared this year. We started the beginning of the year very well across global equities, with European stocks roaring ahead on QE, and EM stocks rallying into April led by China’s breakout. Since then global equities have retraced and the USD strengthening theme has continued, with most major currencies down on the year.
Frontier market equities have been less correlated and are up smalls this year (+1.37% across 53 markets we follow), but the USD strength has been a major factor with frontier market countries down over 5% and eating into USD-adjusted returns:
- Americas and Southeast Asia have been the big winners this year, and 4 of the top 5 markets this year can be found in those regions
- Africa as a whole is flat but there is large variance between markets, ranging from Botswana at +12.54% YTD to Zimbabwe -10.19% YTD
- Europe is also flat and the Euro dropping almost 9% this year has not helped, but again there is large variance, from Malta +23.23%YTD to Ukraine -9.98% YTD
- South Asia was a stand-out last year and have been stable this year on the currency front
- The Middle East has also been stable even with oil still depressed, but are down 4% on currency despite many pegged currencies in the region; this is mainly from Syria’s 20.85% drop
Best Performing Frontier Markets in H1, 2015:
Argentina has had a marvelous year as the only market up over 30% this year in local currency terms. We know what you’re thinking – the currency adjusted returns must be wrong, since we’re using the official government rate instead of the dolar blue rate. But no, a look at dolarblue.net shows that the peso has actually appreciated 3.7% on the year, so if anything the currency returns should be even higher than what we have.
Jamaica’s Combined Index has quietly had a great year, up over 28% YTD. The market has focused on growth by opening online trading in May, and is set to begin trading foreign depository receipts next month. They are also aggressively targeting new listings, with a goal of 50 over the next two years.
Back from the dead, Cambodia has had a surprisingly good year on the back of PPWSA rallying over 45% on the year. This has been due to revenue growth up 33% in the last quarter and net profit almost tripling over the same time period. Given the tight range the stock had been in, there was also some momentum from PPWSA finally breaking out of the range.
It has been a good year for island nation stock exchanges as Malta is up over 23% YTD and is in the top 5 despite the fall of the Euro. Malta’s stock exchange is at an all-time high in market capitalization and is experiencing record volumes at the moment.
Rounding out the list is Vietnam, up 14.59% on the year with the Vietnamese dong also holding quite steady despite USD strength in the rest of the world. As one of the more developed frontier markets, Vietnam has long been interesting to those who see it as the next China. Foreign investment restrictions are being lifted this year on many industries since Vietnam is trying to divest more of its government holdings.
Worst Performing Frontier Markets in H1, 2015:
With Russia at/in their doorstep, Ukraine was a popular buy-low trade last year for many (overly?) intrepid frontier market investors. Unfortunately, Ukraine is still facing a myriad of issues and capital flight has been a real issue, with their currency suffering. Ukraine is a classic case study for buying on the recovery rather than trying to call bottoms, and that buying when everyone else is selling may not always work out.
Colombia’s stock exchange and currency are both down this year, leading to a currency adjusted drop of 23.25% on the year so far. Without taking into consideration currencies, Colombia had the worst performing stock exchange in the world so far this year.
Although the Damascus Securities Exchange is down just under 6% on the year, the terrible performance of Syria’s currency has been the major driver of the year’s poor performance. What’s driving that? Air strikes and the presence of ISIS seems to be the most relevant reason.
Zambia is another country where the poor currency has dragged down overall performance. Zambia is currently facing a massive budget deficit, and is issuing bonds to cover it even as costs escalate. With the forecasted deficit having grown from 4.4% to 7.7% of GDP expected this year, government bond yields have soared and the currency has collapsed. As a massive copper exporter, the fall of commodities this year has not helped and an election next year has brought political risk into the country too.
Another buy-low candidate that was quite popular over the past few years. Egypt was the second worst equity market (and passed Colombia this week) before currency was taken into consideration. Unfortunately, new regulation that prevents investors from acquiring foreign currency will take a toll, and the future is not very bright even at current depressed levels.