The fifth-best stock market is up +51% in Frontier Markets


The fifth-best stock market is up +51% in Frontier Markets

2017 has been an incredible year for Frontier Markets.  For the first time in 5 years, Frontier Markets are poised to outperform developed markets.  Our equal-weight index is up 22% this year and the MSCI FM Index is up 28.9% YTD.  It is an incredible run this year.  The top 5 and bottom 5 markets in our universe are shown below:

Top 5 Bottom 5
Country Return (USD) YTD Country Return (USD) YTD
Zimbabwe +250% Qatar -21%
Georgia +88% Iraq -18%
Mongolia +66% Pakistan -17%
Latvia +54% Myanmar -15%
Kazakhstan +51% Oman -11%


Amongst the poor performers, the only interesting story is Pakistan which was added to the MSCI EM index from the MSCI FM index.  This change was foolishly expected to boost performance, but it has done the opposite, with net flows of over $200mm this year.  The primary driver of this is that Frontier Market funds sold positions more than Emerging Market funds purchased.  This makes sense.  Pakistan had a huge weight in the Frontier Market index but is relatively insignificant as a portion of the Emerging Markets index.  Added to this was strong +46% performance of the Karachi Stock Exchange last year.  The market overshot itself.  It’s still up, net-net from Jan 1, 2016 though.  Oman is down because of political turmoil around it, poor oil prices and a relatively stagnant economy.

The other poor performers don’t merit attention.  Qatar was shellacked by Saudi Arabia’s political games, Myanmar is committing genocide and Iraq has ISIL to deal with.  On the flipside, Frontier Markets are riding a wave of optimism.  It took a long time for markets to get comfortable with the economic prospects within the Frontier, but it seems to finally be registering an impact.  Ordinarily, there is very little correlation amongst various Frontier Markets, however, it appears 2017 is an exception.  Amongst the 60 countries we monitor, only 12 have a negative return for 2017.  22 have a return over 20%, even the basket case that is Nigeria (+21.5%).

Zimbabwe is leading the pack, with a rather shocking +250% return.  However, we would recommend not paying too much attention to it.  Its total market cap is now only about $15bn and there seems to be a lot of speculation in that market.  We suggest reading an excellent write-up on the situation here.

Georgia, on the other hand, appears to be firing on all cylinders.  The economy is expected to grow 4.5% this year and next[1].  In addition to that, the currency has appreciated +7.3% this year because of strong exports, increasing tourism, and remittances that are up 20% compared to last year.  Inflation is high (above 6%), but the economy is well-positioned to continue growing.

Mongolia is up 66% and that is certainly surprising to us.  This is largely on the back of coal’s recovery which has improved exports and provided a strong boost to Tavantolgoi, the largest coal company in the country.  The other big driver is that the largest company in Mongolia, APU JSC announced a planned merger with Heineken’s beer and vodka business in Mongolia.  These two companies represent over half of the market cap of the index.  We expressed strong reservations with Mongolia in our piece from April.  However, since then the market is up +63%.  We were clearly wrong, but we do not believe this rally is underpinned by a strong fundamental story.  The market has passed its highest point since 2011, but it isn’t that far off.  This is scary and irrational.

Latvia has been enjoying a strong recovery, with its economy growing 5.8% this year and similar growth next year[2].  Riga is considered to be one of the most entrepreneurial cities in Europe and has become a significant startup hub.  Particularly in the context of a population of only 2mm people.  There is a significant amount of construction in the country which is boosting growth, but the primary risk is any sort of heightened tensions with Russia.

Kazakhstan has been a beneficiary of Russia’s recovery and increased oil production, both of which have resulted in strong economic growth (+3.8% this year, 3.5% expectations for next year).  The Kashagan field has seen an increased production which has boosted exports after a long period of declines.  The low base for the stock market has certainly helped in addition to baking consolidation with Halyk Savings Bank acquiring Kazkommertsbank, which has created the largest bank in Central Asia.

The full list of the countries we track is below.

Country YTD USD Return
Zimbabwe 249.63%
Georgia 87.26%
Mongolia 65.94%
Latvia 54.32%
Kazakhstan 50.93%
Argentina 46.90%
Malawi 44.45%
Jamaica 43.28%
Macedonia 42.05%
Chile 41.77%
Ghana 30.71%
Peru 30.25%
Mauritius 29.80%
Lithuania 28.74%
Bulgaria 28.17%
Estonia 28.17%
Slovenia 26.37%
Romania 26.09%
Vietnam 23.70%
Zambia 22.29%
Cyprus 21.77%
Nigeria 21.50%
Philippines 19.15%
Kenya 18.52%
Serbia 17.94%
Kuwait 16.74%
Egypt 15.84%
Bangladesh 15.83%
Morocco 15.27%
Ukraine 15.25%
Bosnia & Herzegovina 15.17%
Namibia 14.96%
Colombia 12.49%
Malta 12.30%
Uganda 12.27%
Bermuda 11.63%
Palestine 10.74%
Slovakia 8.91%
Nepal 5.79%
Panama 5.69%
Croatia 5.48%
Bahrain 4.38%
Rwanda 4.24%
Tunisia 4.22%
Sri Lanka 3.69%
Trinidad and Tobago 3.19%
Laos 2.98%
Botswana -0.92%
Jordan -2.65%
Saudi Arabia -3.05%
Cambodia -4.67%
Papua New Guinea -4.72%
Tanzania -5.72%
Cote D’Ivoire -11.26%
Oman -11.31%
Myanmar -14.91%
Pakistan -17.38%
Iraq -17.63%
Qatar -21.09%

As developed markets continue to get more expensive (they too are having a great year in 2017), Frontier markets will continue to look attractive on a relative basis.  As long as the global economy continues to hum along, and all indications suggest that this is the case, then we think Frontier markets will look very attractive to institutional investors.  We are optimistic that this will result in increased turnover and liquidity for the markets we cover.

If you’re interested in investing in any of these countries, check out our How to Invest In section of our website.  As always, any questions, please let us know.




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