A guest post (“Guest post: frontier markets – more profitable, less volatile”) in the Financial Times’ beyondbrics blog has observed the counter intuitive notion that frontier markets can actually be less volatile and sort of a safe haven for investors for two important reasons:
- Insulated From External Shocks. There is a low correlation in market movements between frontier markets and developed markets as the former seem to be more insulated from external shocks or economic shifts coming from the latter as well as from each other. This increases the utility of frontier markets as a diversification strategy.
- Low Liquidity. The US Federal Reserve’s announcement last May that it would “taper” its monetary stimulus has hit emerging markets, but has left frontier markets relatively unscathed in part because its more difficult for fund managers to liquidate their frontier market holdings – forcing them to sell off more liquid positions in their emerging market portfolios. Shallow liquidity also puts a lid on inflows, thus limiting volatility on both the upside and the downside.
The guest post further noted that frontier markets outperformed emerging markets last year with the MSCI Emerging Markets Index ending 2013 falling 2.6% while the MSCI Frontier Markets Index gained 26.3%. The important BRIC (Brazil, Russia, China, India) markets also experienced significant declines (although Chinese share prices bucked this trend).
To read the whole article, Guest post: frontier markets – more profitable, less volatile, go to the beyondbrics blog on the website of the Financial Times.
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