The case for investing in Frontier Markets | The Share Centre

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Emily Fletcher

The case for investing in Frontier Markets

Written by: Emily Fletcher on April 20th 2017

Category: Investments

Many investors will have holdings in developed markets, such as the UK or US, a few will have holdings in emerging markets; an investment in frontier markets goes one step further, investing in those countries at the earliest stage of development. To help manage the additional risk associated with this type of investment, it may also be worth holding it in an ISA, sheltering it from almost all income and capital gains tax, and to use regular savings rather than putting a lump sum in the market in one go. ISAs allow up to £20,000 to be sheltered from income and capital gains tax, though some tax is deducted at source on dividend income from shares.

vietnam

Political and economic reforms are making a difference when it comes to finding growth in frontier markets. Portfolio Manager, Emily Fletcher, reveals the countries making a case for greater investment.

Which region looks most exciting?

We have been increasing our weightings across Asia, the Middle East and South America recently. Within Asia, we would highlight Vietnam as one of the more exciting countries. The economy is growing strongly, driven by ongoing foreign investment. The government is also driving a stock market reform agenda that we expect to result in companies making more shares available to investors, the lifting of restrictions on foreign ownership and the launch of a number of IPOs (initial public offerings), where people are able to buy shares in a private company on the open market for the first time. We have found a number of attractive opportunities with share valuations that offer great value for money. However investors should be aware that Frontier markets are generally more sensitive to economic and political conditions than developed and emerging markets. There may be larger fluctuations to the value of investments and increased risk of losing your capital.

Why invest in South America?

Argentina is the largest investment by country in the portfolio. It was our strongest portfolio performer in the year to 30 September 2016, delivering more than 50% of the total returns of the Trust, driven by the results of 2015’s year-end presidential elections[i]. Following his election, President Mauricio Macri has overseen a substantial shift in economic policy, opening the economy to more foreign investment, eliminating currency controls, cutting export taxes and reducing energy subsidies. We think that these reforms create an enabling environment that will allow companies investing in Argentina to earn attractive returns as the economy responds to these measures.

kuwait

Where are the opportunities in the Middle East?

We have been increasing our investments in Kuwait over the past few months with total allocation reaching 11.5% at the end of February 2017. We have been impressed by an acceleration of government-led reform initiatives that look to increase infrastructure spending, while also looking to control overall public spending and inefficiencies in the economy. The government is also working on a number of stock market reforms. Given historic underperformance, we believe that shares are priced attractively.

What is the biggest risk for the portfolio?

We believe that the biggest risk would be a substantial (more than 20%) sell off in global markets. The performance of frontier market stocks is not typically influenced by events in the more developed world with performance instead being driven by local political and economic events. Frontier countries are less exposed both to global trade and the flow of money between international businesses and markets. Consequently, frontier markets tend to trade independently of each other with events in one country having little impact on the market performance of others. However, in times of significant global stress, even frontier markets are not immune and it can affect performance.

For more information on the BlackRock Frontier Investment Trust plc and how to access the investment opportunities these relatively new markets can offer, please visit here.


[i] BlackRock Annual Report, 30 September 2016

Annual performance (%) to last quarter end (GBP)

31/03/16-31/03/17

31/03/15-31/03/16

31/03/14-31/03/15

31/03/13-31/03/14

31/03/12-31/03/13

BlackRock Frontiers Investment Trust plc NAV

35.60

-3.57

7.63

15.47

20.77

MSCI Frontier Markets Index (NR USD)

29.72

-9.67

8.24

13.85

17.45

 

BlackRock, April 2017. BlackRock performance figures are calculated on a total return basis with net income reinvested including management & operating charges and any performance fees.

Past performance is not indicative of future results. It is not possible to invest directly into an index. Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.

All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed.

Trust specific risks: Overseas investment will be affected by movements in currency exchange rates. Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore the value of these investments may be unpredictable and subject to greater variation. Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall. Frontier markets are generally more sensitive to economic and political conditions than developed and emerging markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund. There may be larger fluctuations to the value of your investment and increased risk of losing your capital.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of March 2017 and may change as subsequent conditions vary.

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Tags: frontier markets, frontiers, investing, blackrock, asia, south america, middle east

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