The Best and Worst Frontier Markets In Q1 of 2016

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Frontier Markets Are Up 1.90% in Q1 of 2016

The first quarter of 2016 is in the books, and the 59 frontier equity markets that we track on our dashboard are up 0.81% YTD in local currency terms, but up 1.9% YTD in USD terms. Yes, you read that right – the end of the USD rally has given frontier equity markets an unexpected boost this year with frontier market currencies up 1.09% YTD across those we track.

As expected of frontier markets, we’ve had some big moves in local markets this year. We took a look at the top and bottom frontier equity markets this year:

Best Frontier Equity Markets in Q1 of 2016

BestFMinQ120162South America has been the strongest region so far this year with the #1 (Peru), #2 (Colombia), and #6 (Chile) best performing equity markets. Peru has had the best frontier market equity performance in both local currency and USD terms. Brazil has been the best performing stock market worldwide this year.

Why the strength in South America and Peru this year?

It’s mainly from the rally in metals as after a strong-selloff last year, and with the USD finally coming off, metals have soared across the board so far this year. Gold and Silver are up over 15% and 9% YTD, while base metals have also done well with Zinc and Tin leading the way with 16% and 15% YTD moves. As a result, mining stocks which had uniformly sold off heavily over the past few years have found new life.

1. Peru: +23.39% YTD

Peru, where over 70% of its exports are raw commodities, and where the bulk of the stock index is made up of mining companies, has benefited tremendously from this bounce in commodity prices. However, it must be noted that this is a rally from a very low level – since hitting a high in April 2012, the general index is still over 50% lower despite the stock market rally this year:

PeruGeneralIndex20162. Colombia: +21.07% YTD

Colombia’s COLCAP Index was not far behind Peru’s. With oil and its derivatives making up over 63% of its exports, the rally in oil companies this year has helped the index greatly. But it hasn’t just been commodity related stocks that have done well this year. Bancolombia is the biggest component of the COLCAP Index (just under 14% weighting), and is up almost 20% this year. While Colombia still faces the prospect of stagflation, the switch to emerging market equities this year has clearly benefited Colombia as it has seen equity inflows greater than any of its peers in South America.

3. Nepal: +18.21% YTD

Unlike the indices in South America which have done well this year in part due to how poorly they did the years before, Nepal has posted steady gains over the past 3 years and is up over 50% since the beginning of 2015. It is also one of the more obscure markets we follow – Bloomberg does not even have data on it – so is on the fringe even among the frontier markets we follow.

While the market’s performance has been attributed to excess liquidity in the banking system and recent market reforms, the nearly 165% gain since Q1 of 2013 has spooked the local regulator. The Securities Board of Nepal (Sebon) released a statement this week warning investors to be cautious, citing the slowing economic growth rate and lacklustre financial performance of local companies. As a result, the index is off the highs but still among the best performing in the world this year.

Worst Frontier Equity Markets in Q1 of 2016

WorstFMinQ12016No region stands out in terms of worst performers, but it is worth noting again that bad performance this year was not a result of currency weakness but of local issues in the market. Our bottom five markets (out of the 59 we monitor) were very diverse geographically, without any region being home to more than one. It was also interesting to see a couple of very commodity dependent countries at the bottom of the rankings in contrast to the top markets.

1. Iraq: -24.74% YTD

Iraq’s ISX Index has been in a steady decline since the end of 2013, and has dropped over 42% since hitting a high at the end of June 2015. This is the graph from the Iraq Stock Exchange website – it ain’t pretty:

ISXPast1YrWhy has the Iraqi Stock Exchange struggled?

Three main reasons:
1. Declining oil prices
2. ISIS
3. Falling volumes from liquidity issues and foreigner investor presence declining

Approximately 98% of Iraq’s exports consist of oil, so with an economy still in the early stages of rebuilding, the fall in oil prices has hurt Iraq more than almost any other country in the world. The war with ISIS has also ravaged the country; civilian deaths in 2014 and 2015 were over 20,000 and 15,000, compared with under 5,000 every year from 2009-2012. Cash is also tight in the country, especially with the central bank intervening to keep the currency relatively stable.

2. Mongolia: -16.54% YTD

Mongolia’s stock market has always followed the boom and the bust of the commodity cycle to its extremes. The commodity price downturn has devastated Mongolia’s economy, and its economy is forecasted to grow just 0.8% this year, down from a prediction of 7.7% just two years ago! All the concerns with China’s growth slowing this year has also magnified the issues in Mongolia. There are also the ongoing issues with its biggest mine, with an agreement still far away with Rio Tinto.

The market has not bounced at all despite the commodity bounce, which is probably a result of investors going for the exits on an economy that is looking bleaker by the day. We recommend reading this WSJ article about the current situation.

3. Zimbabwe: -14.85% YTD

In a country where metals make up almost 40% of its exports, the stock market’s poor performance is surprising for 2016. While Zimbabwe’s economy has long faced well publicized problems with inflation and other issues, you would expect mining stocks to fare better than this.

The main issues seem to be political, specifically the Indigenisation and Economic Empowerment Act that forces all firms valued at over $500,000 USD to be owned at least 51% by locals. This of course includes the many foreign-owned firms in the country, and with a deadline for compliance this week, the country has warned any companies that have not complied that they could be forced to shutdown. This policy has of course spooked foreign investors and caused uproar among the local population worried about further economic uncertainty.

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