Quick Take: Frontier Markets - Low Valuations Attractive Prospects

Authored by

  • Kurt Livermore, CFA

    SVP, Portfolio Manager

  • Joe Ritter, CFA

    VP, Product Strategist

Frontier market relative valuations: Near historic lows

  • Relative to emerging and developed markets, frontier market price-to-earnings ratios are approaching the depths last seen during the Global Financial Crisis. (top chart)

  • This comparative discount reflects both towering DM and EM valuations as well as the disproportionate impact of the COVID crisis on frontier. 

Institutional flows: Net redemptions in recent years

  • Since 2017, frontier strategies have experienced net outflows. Cumulative flows, in fact, are essentially flat since 2012. (bottom chart) As a result, several asset managers have shuttered their frontier strategies.

Fundamentals remain enticing

  • The growth outlook for frontier countries remains encouraging given favorable demographics, relatively low levels of government and corporate debt, and supportive macroeconomic factors. Although the relationship between GDP growth and equity returns is complex, we see current relative valuations as an attractive entry point.

  • Furthermore, we believe that diminished focus on frontier from the institutional active management community will create greater opportunity for those skilled active managers who remain focused on these markets.

Relative P/E Ratios: Frontier versus Emerging and Developed Markets

Quick Take Frontier markets- low valuations attractive prospects Picture1
Ratio of trailing twelve-month P/E ratio for MSCI Frontier Markets relative to MSCI Emerging Markets and MSCI World. It is not possible to invest directly in an index. Every investment program has the opportunity for losses as well as profits. Past results are not indicative of future results 

Institutional Asset Flows

Quick Take Frontier markets- low valuations attractive prospects Picture2
Cumulative asset flows in the eVestment Frontier Markets universe. Sources: Acadian based on data from MSCI and eVestment. For illustrative purposes only.MSCI data: Copyright MSCI 2021, All Rights Reserved. Unpublished. PROPRIETARY TO MSCI. eVestment data: eVestment and its affiliated entities (collectively, "eVestment") collect information directly from investment management firms and other sources believed to be reliable; however, eVestment does not guarantee or warrant the accuracy, timeliness, or completeness of the information provided and is not responsible for any errors or omissions. Not for general distribution. * All categories not necessarily included; Totals may not equal 100%. Copyright 2013-2021 eVestment Alliance, LLC. All Rights Reserved.

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