Pakistan, Nigeria, Bulgaria… the cash keeps coming
The frontier markets juggernaut continues. Here’s a great graphic from Bank of America/Merrill Lynch showing the diverging fund flow dynamic into frontier and emerging equity markets.
What it shows, according to BofA/ML is:
Frontier market funds with year-to-date inflows of $1.5 billion have decoupled from emerging markets ($2.1 billion outflows year-to-date)
In other words, frontier fund inflows since January equate to 44 percent of their assets under management (AUM), the bank says.
In terms of market returns, frontier equities, comprised of some of the most esoteric and supposedly illiquid markets, are up 18 percent this year while MSCI’s broader emerging equity index has lost 9 percent. Some frontier markets such as the UAE, Bulgaria and Pakistan have returned over 50 percent this year in dollar terms. That takes some beating.
The reasons for the outperformance are known. (Here’s an excellent piece on this subject by my colleague Carolyn Cohn) In short, these stocks have attracted those long-haul, adventurous investors who are aware of the risks and are happy to park their money somewhere for a few years. Many of the countries are benefiting from relatively high commodity prices. Unlike in the big emerging economies, listed companies in Kenya or Pakistan tend to be true plays on the emerging market consumer.
BofA/ML also notes good news on the earnings fronts in many of these markets. Earnings growth estimates for this year have risen sharply almost everywhere to 10-15 percent (versus the 9.8 percent average in emerging markets). Some markets such as the UAE and Saudi have seen earnings upgraded by around 500 basis points for this year.
Unsurprisingly, frontier stocks now trade at a premium to emerging equities on a forward earnings basis. Yet BofA/ML writes:
Frontier equity valuations do not look stretched relative to history, leaving plenty of room for further upside over the coming months