World-beating economic growth will likely drive returns in Frontier Market Debt

Author: Marco Ruijer, Lead Portfolio Manager, Frontier Communications Market Debt and Emerging Market Debt Hard Currency at NN Investment Partners

Marcoruijer
Marco Ruijer

The world-beating economic growth that Frontier Communications Markets are set to generate in the coming years means the bonds that they issue offer investors outstanding potential. Frontier Communications Market Debt (FMD) captures the potential of the next generation of emerging markets, which have already attracted many investors seeking yield and portfolio diversification.

FMD is also less vulnerable to macroeconomic scenarios that involve rising US interest rates because it has low correlation with US treasuries and tends to be of relatively short duration. An analysis by JP Morgan (as per end of October 2017) of historical data between January 2006 and October 2017 shows that the average correlation with US Treasuries was -0.10 while it was 0.22 for EMD Hard Currency.

Marco Ruijer, Lead Portfolio Manager, Frontier Communications Market Debt and Emerging Market Debt Hard Currency at NN Investment Partners, commented: “The story of frontier markets is one of catch-up and convergence. They have many of the characteristics that emerging markets had in the 1980s when they were first identified as an investable group. Most frontier markets are still at the very early stages of economic, political, financial, institutional and business development and therefore have attractive long-term prospects.”

The growth outlook for frontier economies is reasonably good in the medium term and very good in the long term. “The majority of the 25 fastest-growing economies over the past decade were in the FM category and we see El Salvador, Sri Lanka, Ecuador, Costa Rica and Ivory Coast as particularly important markets. The African and South Asian economies should also continue to expand faster than peers: The IMF forecasts an average annual growth of 1.4%-14% for these economies over the next five years versus just 1.7% for developed markets”, Ruijer explains.

One of the key attributes supporting higher and sustained economic growth in frontier markets is their buoyant population growth. This keeps the median age lower and younger populations create the potential for higher and sustained growth through an expanding workforce, greater demand for goods and services and a higher savings rate. This contrasts with developed economies, which have stagnant or declining populations.

Ruijer ends: “Recognition of the greater potential economic growth and favourable demographics of frontier markets is evidenced by the extensive foreign direct investments (FDI) they have attracted. China, for example, has been investing in Africa’s commodity- and infrastructure-related sectors for some years.

China’s growth is likely to moderate mildly in the remainder of the year, nevertheless, China’s growth momentum remains strong and the full year growth is likely to comfortably beat the 6.5% target set by the government. This is one example of many which showcases that both the commodity prices and FDI will likely remain quite supportive for economic growth in frontier markets.

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