Frontier Funds
From the beginning of 2013 through the first five months of 2014, the MSCI Frontier Markets Index was up > 50% while the MSCI Emerging Markets Index was flat. Frontier countries such as Bulgaria, up 91%, Pakistan, up 88%, and Nigeria, up 47%, had strong returns over this 17-month period. Research now shows these markets may not be as unstable as suspected.
Fund manager LR Global looked at weekly returns, in U.S. dollars, of 80 stock indexes from developed, emerging, and frontier markets for the 10-year period 2004-2013. The study shows that over this period, frontier stock exchanges were less volatile than those of emerging markets and even slightly less volatile than developed markets—as measured by median standard deviation.
Approximate Median Volatility (Standard Deviation): 2004-2013
[average over the 10-year period shown in parentheses]
|
|
2004 |
Lowest |
Highest |
2013 |
|
Frontier Markets (17.4%) |
18% |
17% |
33% |
17% |
|
Developed Markets (23.7%) |
20% |
15% |
34% |
24% |
|
Emerging Markets (24.1%) |
20% |
20% |
40% |
24% |
In general, local investors, short-term foreign capital inflows and withdrawals, and politics are what drive frontier markets. For example, over from 2009-2013, Mongolia’s leading stock index went from 4,600 points to 32,500 and then back to 15,000. Over the same period, Ukraine went from 1,000 to 3,000 and then down to 800.
The five most volatile stock markets in the world are: Iceland (a developed country), Ukraine, Romania, Argentina, and Kazakhstan. According to the LR Global study, the two least volatile of the 80 countries reviewed was Trinidad and Tobago. The U.S. ranked as the 11th least volatile market.