Stock Surge Puts Asia’s Frontier Markets on the Map

Investors in Asia are increasingly looking beyond the region’s heavyweights and placing their bets on lesser-known frontier markets, hoping to cash in on rising tides of economic growth and maturing demographics.

The MSCI Frontier Markets Asia Index has jumped 19.4% in the 12 months to April 28 versus a 16.5% gain in the MSCI AC Asia Pacific Index. The benchmark is up 4.5% in the first four months of this year and tracks stocks from Vietnam, Bangladesh and Sri Lanka, ATimes reported.

Pakistan has also been part of the index, but will be reclassified to emerging market status on June 1.

Mark Mobius, executive chairman of Templeton Emerging Markets Group, made the case for frontier markets on a blog entry dated May 1.

“In our view, frontier markets could offer exciting long-term investment opportunities, given robust fundamentals, including strong economic growth, access to resources and favorable demographic profiles, with additional possible benefits from improvements in technology, infrastructure and standards of governance,” he said.

“Additionally, market valuations for frontier corporations generally stand below those of their peers in developed markets.”

Following a 13.3% drop in 2015, the MSCI FM Asia Index still trades at just 14.7 times earnings despite its recent rally. By contrast, the MSCI benchmarks for the US, Germany, Australia and Japan all traded at more than 16.5 times earnings.

Concerns about political stability and the existence of proven growth opportunities elsewhere in the region have caused Asia’s frontier markets to go overlooked at times. They are emerging as a preferred portfolio component now, however, as investors look to hedge their bets amid headlines of potential economic slowdowns in other corners of the region like China and South Korea.

MSCI uses a three-tiered system of country indices with frontier markets ranking at the low-end, followed by emerging and then developed markets. Including the frontier markets in Asia, MSCI tracks 30 worldwide like Kenya and Morocco in Africa, and Lithuania and Croatia in Europe.

Frontier markets are characterized as having lower levels of liquidity, operational efficiency and foreign ownership. As a result, risk-averse investors have been reluctant to pour too much money into them.