As investors dump emerging market equities at an unprecedented clip, they are turning to frontier markets in search of the next growth story.
While Brazil, Russia, India and China led the global economy out of the 2008 financial crisis, investors have been fleeing the biggest developing nations as their growth sputters.
The Hang Seng China Enterprises index is in a bear market, Brazil has suffered its first credit-rating cut in a decade, and Russia faced international sanctions for its Crimea takeover.
Stocks are rallying, meanwhile, in places like Kenya, on oil discoveries, and Vietnam.
“Everybody is looking for the next China,” said US Bank Wealth Management’s Jim Russell.
“We think Africa is probably one of the areas.”
Emerging market stocks tripled in the 10 years through 2007, returning more than four times as much as the Standard & Poor’s (S&P) 500 index, as booming global demand for raw materials and the rise of middle classes drove growth.
But stocks from the Bric nations have slid 7.1% in the past year – compared with a 19% gain for the S&P 500 – as investors lost confidence in their growth prospects.
“Traditional emerging markets have struggled under what are very secular changes, and investors have responded… by a reallocation in their portfolios,” Christopher Wolfe at Bank of America Merrill Lynch’s private banking and investment group said.
“Frontier markets may be where emerging markets were in late 1980s and early 1990s.
You’re really looking for the next 10 to 15 years.”
MSCI, the New York-based provider of stock market indices, says frontier markets need to be accessible to foreign investors and in countries not going through extreme economic and political instability.
They tend to have more relaxed liquidity and market-cap requirements.
NEW YORK BLOOMBERG