Relative Value
The MSCI frontier index is valued at 11.6 times reported profits, a 27 percent discount to the MSCI All-Country index, after trading at a premium as recently as June 2011, data compiled by Bloomberg show. The frontier index’s dividend yield of about 3.6 percent and its projected earnings growth of 17 percent are both about one percentage point higher than the emerging-market gauge.
Consumer spending in frontier nations will climb 9.2 percent on average this year, faster than the 8.3 percent pace in emerging markets, according to Euromonitor International, a consumer research firm.
Smaller price swings and lower correlations in frontier countries appeal to investors looking for returns less tied to fluctuations in global markets, said Rami Sidani, a money manager at Schroder Investment Management in Dubai.
Trading Volumes
The MSCI frontier measure’s 50-day historical volatility of 5 and its correlation of 0.4 with the All-Country index compare with readings of 8.6 and 0.6 for the emerging gauge, according to data compiled by Bloomberg. A correlation of 1 means prices are moving in tandem while zero indicates no relationship.
“What happens in the U.S. has an impact on China’s exports, but it has less of an impact on how many beers the average guy in Kenya is drinking” said Hans-Henrik Skov, whose $58 million BankInvest New Emerging Markets Equities Fund climbed about 37 percent last year and owns shares of East African Breweries.
Frontier funds may lose some of their advantage as the lockstep moves among equities in bigger markets diminish.
A measure of how much the 2,073 companies in the FTSE All- World Developed Index fluctuate in unison has dropped 31 percent since June, the biggest decline since at least 1993, data compiled by Societe Generale SA and Bloomberg show. That makes it easier for money managers to pick stocks that beat the market, according to Morgan Stanley.
Reducing Risk