Frontier Markets Anticipate Continued Growth

(Bloomberg) — It seems that frontier markets are on track to sustain their rally into the next year, driven by optimistic investors who are hopeful about economic recovery and a decrease in risks associated with sovereign defaults.

Asia Frontier Capital, a fund manager based in Hong Kong that targets high-growth economies in the region, has recently purchased shares in Sri Lanka and Bangladesh. Meanwhile, Aberdeen Group is eyeing potential bond gains in countries like Argentina, Ghana, and Ecuador. Federated Hermes is also boosting its investment in frontier bonds, particularly favoring those in Nigeria, Sri Lanka, Pakistan, and Ecuador.

Interestingly, some nations that once struggled with significant debt are now favorites among investors, having strengthened their public finances and being viewed as less vulnerable to trading tensions and geopolitical instability. This marks a notable shift from previous years when some of these countries faced serious sovereign crises and debt restructuring challenges. Ironically, this optimism contrasts sharply with ongoing worries about fiscal issues in many advanced economies.

“The frontier story has only just begun,” remarked Ruchir Desai, a fund manager at Asia Frontier Capital. “These nations have restructured their economies and fundamentally changed how they are governed.”

The MSCI Frontier Markets index has seen a remarkable 43% increase this year in dollar terms, the best performance since 2005. Additionally, the FTSE Frontier Emerging Markets Government Bond Index rose by 12%, setting a new record. Countries like Egypt, Pakistan, and Bolivia are leading the pack in terms of debt returns, according to Bloomberg’s data.

“Frontier bonds present a compelling income return and capital appreciation opportunity, making them an appealing total return strategy into 2026,” shared Mohamed Elmi, a senior portfolio manager for emerging market fixed income at Federated Hermes. “These issuers have unique characteristics and tend to be less connected to broader market risks.”

Daniel Wood, a portfolio manager at William Blair Investment Management, expressed strong confidence in frontier markets, stating they are among the firm’s “highest beliefs.” He mentioned a preference for a diverse array of peripheral countries that are largely uncorrelated and continue to provide strong returns, particularly highlighting Uzbekistan, Kazakhstan, and Ghana.

That said, some experts caution that investors might want to temper their expectations for bond returns next year, as yield premiums on sovereign bonds, such as those of Ivory Coast, have dropped significantly. Moreover, investing in frontier markets typically comes with inherent risks, including illiquidity and political instability.

But there remains a sense of hope. Aberdeen, which reported $930 million in assets for its frontier market bond fund as of November, plans to increase its investments in local currency bonds in these countries next year, according to Kevin Daly, the fund’s portfolio manager. This fund has outperformed 98% of its peers over a five-year timeframe, and Daly suggested it might pursue more local currency bonds in Uganda and Kazakhstan.

“The worst-case scenario for frontier markets is a prolonged risk-off period, but such phases generally don’t last too long,” Daly pointed out. He added that investor interest tends to spike again as asset prices adjust downwards. “While this year has been challenging due to external factors, we’ve also gained from a more favorable environment.”

What to Watch

• Central Banking Week kicks off Wednesday, with particular attention on the Federal Reserve, where a rate cut is anticipated. Brazil’s central bank is also set to announce policy changes on Wednesday, followed by decisions from the Philippines, Peru, Serbia, and Turkey on Thursday.
• Several major emerging economies will release inflation data this week, including Mexico on Tuesday, China on Wednesday, Argentina on Thursday, and India on Friday.
• Monday will see the release of trade statistics in China, with subsequent data from Taiwan and Chile expected later.
• Additionally, production data will be published in Türkiye, South Africa, Malaysia, and Mexico.