Stockholm (Ekonamik) – The last few months have been busy for frontier markets, with both rate cuts and crises making the news, from Latin America to South-East Asia, and through Africa and the Caucus.
Domestic Concerns and the Trade War
The second quarter of 2019 was good to frontier markets, according to HSBC. “Over the quarter, performance across countries was more positive than negative within the index,” HSBC noted in the quarterly review of its frontier market fund. “Argentina, Romania, Kazakhstan, Ivory Coast, Croatia and Kuwait all produced returns above 10% over 2Q. While, Pakistan, Uruguay and Sri Lanka were down by 10% or more. Within sectors, IT and Energy were the best performing while Real Estate and Consumer Staples were the worst performing and only sectors in negative territory.” However, this strength seemed to fade during the third quarter, and by August the fund was underperforming its benchmark. Nevertheless, the worsening performance was consistent with the MSCI frontier benchmark, which was down 1.59% on a monthly basis, despite growing by 13.15% since the start of the year.
Monetary policy-wise, Sri Lanka, Paraguay, Egypt, Iceland and Namibia have cut their rates in the last month. In most cases, the decisions were driven by concerns about the escalation of the USA-China trade war and the impact it may come to have on economic growth via the trade balance.
The issue was different in Sri-Lanka, where concerns were more tilted toward domestic drivers of trade deficits and the fall in tourism that the country experienced following the Easter Sunday Terrorist attacks. However, domestic considerations could also bear in the other direction. In Georgia, currency depreciation fears fuelled a rate hike last week.
“It has been a rather strange year,” noted Tundra Fonder in the August newsletter of its sustainable frontier fund. “Our perception is that investors are quite cautious and pessimistic overall. However, this has not been generally reflected in all equity markets, but selectively and especially in small and medium-sized companies. We have all noted that the best appetite has been seen in the bond markets.”
Kashmir Weighs on Pakistan
The MSCI Pakistan IMI benchmark index, which fell 5.72% in August. The main culprit was uncertainty about the status of Kashmir and the potential for conflict escalation with India.
India put the region on lockdown at the beginning on August 8th, when it arrests hundreds of terrorist suspect, downgraded the Indian Kashmir from a “state” to a “territory”, limiting abolishing Jammu and Kashmir’s right to self-determination. All communication in the state was cut, including phone-lines and internet connection. The crisis has seen stories of arbitrary arrests, torture and health care chaos making the headlines for the last month.
As Tundra puts it, “India, on the other hand, claims legal rights to Kashmir in accordance with the agreement that the former Maharajah of Kashmir struck with India in 1947. India also claims that Pakistan actively destabilises the region by supporting terrorist activity, something Pakistan denies. India has now close to 1 million soldiers in the area (vs a population of 11m).” The Swedish asset manager does not expect the crisis to escalate into a full-blown military conflict.
Argentina Bites the Dust, Again
Argentina is the throes of what appears to be yet another financial crisis. Although Bankinvest noted that optimism regarding the South American country had been vital in supporting the performance of its New Emerging Market fund in the second quarter, this was not to last. The paradigm shift came on the heels of the first round of the presidential election on August 11th, which showed conservative reformer Macri was much further behind his populist opposition than the polls had suggested. The suggestion that he was unlikely to win the second and final round of the election led local markets to fall by 40% in on August 12th. By the end of the August President Macri began debt restructuring negotiations with the IMF on the US$ 101 billion it owes the international organisation.
According to media reports, one of the world’s largest fixed-income investor, Franklin Templeton’s Templeton Global Macro is said to have made US$ 1.8billion in losses from its exposure to Argentina during a single day in the middle of August. The country was a favourite of asset manager Dr Michael Hasenstab, and the US$11.3 billion Templeton Emerging Markets Bond Fund has more than 10% exposure to Argentine debt.
Local ETFs in Vietnam
Vietnam proposed new regulations that would allow local asset management companies to “create ETFs on stocks where the foreign ownership limits have been reached (a.k.a. FOL stocks),” according to Tundra Fonder’s August newsletter. The market rejoiced at the news according to the frontier asset manager. If approved, the new regulations would allow foreign investors to “get exposure to companies they previously weren’t able to or had to pay a big premium for when buying from other foreign holders.”
Market wise, the country did well, showing that the trade war is not necessarily bad for everyone. “The market was supported by local investors as they see Vietnam as a beneficiary of US businesses moving out of China,” Tundra explained.