Morocco fears its stock market is on the verge of being re-classified as a frontier market when index provider MSCI announces its annual rejig of equity indices this month.
Maybe it should pray for relegation instead. A report at the end of last week by Citi notes the boom in frontier market equities — they have risen 15 percent since the start of this year, a stark contrast to their better known, more liquid emerging market cousins which have fallen around 5 percent so far this year. In fact the performance of the frontiers — comprising less liquid, smaller markets from Kenya to Kazakhstan — has been more akin to the U.S. or Japanese equity markets which have earned investors double-digit returns this year.
Citi notes that the seven best returning markets in the world this year are all in the so-called frontiers, while the nine worst laggards are from the emerging world. Check out the graphic below. It shows how markets such as Kenya, Bulgaria and the United Arab Emirates have rallied more than 40 percent this year.
Many will find the divergence unsurprising. These indices are more likely to comprise smaller consumer stocks and banks — in demand at the moment as profits fall at the big industrial and commodity giants that dominate emerging indices. In most of these markets and especially in sub-Saharan Africa, penetration of services such as bank credit and mobile telephony is far lower than in emerging markets and companies usually have less competition to contend with. What’s more, frontier stocks, for the most part, are cheaper than their emerging peers — Citi puts the average discount at the moment at 22 percent.
In other words, if you want a punt on the emerging market consumer, go to the frontiers.