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Growing confidence in frontier markets

11 July 2013

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Nearly one in five pension fund managers believe that frontier markets have the biggest potential for equity gains over the next ten years, research by Baring Asset Management (Barings) has found.

In Barings' poll in October last year only 13% of pension funds estimated that frontier markets, such as Nigeria, Saudi Arabia and the Ukraine, would offer the best equity returns over the next decade.

The poll, which included the opinions of 75 investment managers of UK private or public pension schemes between May and June this year, also revealed that overall, pension fund managers have more confidence in the developing world over their developed market counterparts.

Andrew Benton, Barings' head of UK and international institutional sales, said: "The growing interest in frontier markets is a trend that we believe is likely to grow.

"Barings believes frontier markets offer the potential for strong long-term growth, in a low growth world. Low correlation with both emerging and developed markets, as well as low intra-country correlation, means that frontier markets also offer diversification benefits."

The research showed that there was a growing belief in Africa and Latin America, which both increased from 7% in October 2012 to 16% in May 2013.

Even so, Asia remains the most popular region with 22% favouring the markets of China, Malaysia, South Korea, Thailand and India for equity gains, although this has dropped from 60% in October last year. Japan fell from 4% in 2012 to 0% this year.

Benton said: "Frontiers are markets at an early stage of development and as such they have traditionally carried higher governance risk.

"However, Barings believes there has been a tangible change in policy mix across these countries: democratisation has a chance of taking root in the Middle East following the Arab Spring, and there has been a general trend away from autocratic to democratic regimes in Africa."

Regarding equities, the poll also revealed that growing macro-economic concerns mainly centre around developed markets.

This year a total of 28% fund managers compared to 20% in October last year believed that stagnant or negative UK GDP was the biggest challenge over the next six months, while nearly double from 11% to 20% believe that the UK is at risk from inflationary conditions.

Concerning the US, 38% believe that US economic health is the greatest worry, but 66% of pension fund managers have cited the Eurozone as the biggest concern.

However, this figure represents a decrease of 14% in October 2012, while faith in potential European equity gains increased for the first time since May 2012 to 4%, having been at 0% in May and October last year.

Benton said: "With growing concerns around the capacity of developed markets, investors will continue to source opportunities in regions which they consider 'untapped'.

"Over the last 20 years, the free float market capitalisation of core emerging markets (MSCI Emerging Markets) has increased 25 fold and we believe that frontier markets are now positioned where emerging markets were 20 years ago, poised to become the next big opportunity in the coming years."

First published 11.07.2013