A year of drifting… but better times beckon

- "For frontier market equities, 2010 has been a disappointing year. After rallying early in the year, the MSCI Frontier Markets (ex-GCC) index has steadily underperformed the emerging markets index and is flat for the year versus a gain of 6% for GEMs. This puts the frontier markets on track to underperform the larger emerging markets index for a fourth consecutive year."
- "Some success stories, but many markets have struggled. Sri Lanka, Bangladesh, Estonia, Argentina and Kenya have all benefitted from a combination of supportive political developments and a recovery from oversold conditions last year. Many Eastern European markets have lagged, as have Kazakhstan, Jordan and Lebanon."
- "The macro outlook continues to improve. Economic output in the frontier economies is recovering more quickly than expected, with average growth now expected to exceed 4% next year. Inflation has picked up modestly but remains close to historic lows, while current account deficits are back to sustainable levels in most countries."
- "Valuations: still reasonable if not cheap. Frontier market earnings have not rebounded as quickly as they have in emerging markets and thus the region’s discount to EM has closed somewhat. However at 12.3x trailing earnings and 1.7x book value, the index remains at a significant discount to both its own history and EM peers."
- "Low volumes, high correlations. Trading volumes have been muted, and frontier markets are not providing much diversification with the 40-week correlation to global markets now at an all-time high of 80%. We do not expect either trend to last however."
- "With the growth story largely intact, frontier markets look positioned to outperform. Our top markets are Nigeria, Argentina and some of the “value” Baltic/Balkan markets, especially Estonia and Bulgaria. We also like Kazakhstan and Kenya. Preferred frontier market stocks under coverage include: Galicia (Argentina), Halyk Bank (Kazakhstan), Hikma (Jordan), Kazmunaigas (Kazakhstan), Nova Kreditna Banka (Slovenia) and Solidere (Lebanon). Indirect plays on frontier markets that we like include Afren, Aggreko, CETV, Millicom and MTN Group."


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