from Fund Web..
May 10, 2013, By Pamela Morris
As frontier markets outperform their emerging counterparts, Blackrock chief investment strategist Russ Koesterich believes there are still opportunities to be discovered in frontier markets.
Koesterich says the underperformance seen in emerging markets so far this year has not spread to the frontier, which has outperformed both emerging and developed markets.
However despite this outperformance, Koesterich believes it is “not too late to explore the frontier” and urges investors to take a small strategic allocation to equities in pre-emerging markets.
He points out that value can still be found in frontier markets as they trade at a price to book ratio of approximately 1.2, according to the MSCI Frontier Markets 100 Index.
Koesterich notes that this is well below the 1.6 ratio of the MSCI Emerging Markets Index. He adds: “Despite their outperformance, frontier markets still appear to be good bargains.
“And while firms in frontier markets are less profitable than emerging market companies, frontier stocks look inexpensive even when this difference in profitability is accounted for.”
Koesterich sees positive signs of growth within pre-emerging markets too. He says: “Frontier valuations also look attractive considering that I expect these markets to experience faster growth in coming years than many emerging and developed world countries.”
Including exposure to frontier markets can add diversification to a portfolio, according to Koesterich. He says: “Companies in frontier markets tend to just focus on demand in their local countries and thus are less tied to the global economy than emerging markets like China and Brazil.
“This means frontier markets have exhibited a low correlation to emerging and developed markets and can add some diversification to a portfolio.”
The strategist acknowledges that investing in frontier markets “can be risky” as frontier countries “generally have less established equity markets”, as well as more regulatory and political “unknowns” compared to other areas of the world.
However Koesterich is ultimately long frontier markets and says, assuming that frontier markets will likely decrease in risk as they develop over the long term, “current valuations present a potential buying opportunity”.
“Frontier markets are a strategic asset class, along with US equities, bonds and gold, that investors want to consider always having a little of in a portfolio,” he concludes.