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A-rated manager examines the future of frontier markets

As Pakistan joins the emerging market index, Oliver Bell reveals his predictions for other growing countries.

Frontier future

Pakistan achieved the status of an emerging market this week, leaving 23 countries in the frontier market index. The country’s six stocks now make up 0.1% of the emerging market index.

Citywire A-rated Oliver Bell, who manages the T Rowe Frontier Markets Equity fund, believes that a prolonged period of peace is creating a safer atmosphere and attractive foreign investment, which is leading to strong economic growth.

In this gallery, Bell examines how other countries are performing and predicts how they will be classified in the future.

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Argentina

Bell said that Argentina should enter the MSCI EM Index next year. The country benefited from a new president and the markets rallied.

‘Argentina’s reversal of fortune dates back to October 2015, when we witnessed much needed change in politics through the election of business-friendly Mauricio Macri as President,’ Bell said.

‘We now need to see further political reforms and inward investment to deliver sustainable growth in the economy. If Macri can consolidate power in the October legislative elections the reform drive can continue.'

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Iran

Bell describes Iran as ‘the major unknown’ and conducted a research trip 18 months ago prior to the lifting of sanctions. There could be opportunities for investors.

‘What we found was a real eye-opener and exposed many of our biases as wrong. Iran appeared more like Turkey than Saudi Arabia – Tehran being a very cosmopolitan city with a much more liberal attitude than we expected, with women appearing fully integrated into society,’ Bell said.

‘Importantly, the country is educated, entrepreneurial, and asset rich, but remains cash flow poor because of the sanctions that have been in place since 1979. Putting aside the politics, the established and diverse stock market would be a welcome addition to frontier.’

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Peru

While Peru has achieved a decent level of economic diversification and been one of Latin America’s strongest growth performers, Bell says the country is ‘teetering on the edge'.

‘Peru’s status remains “on watch”, given only three of its stocks (one of which is US-listed) meet the liquidity requirements of the MSCI Emerging Markets Index – with three being the minimum number needed to meet this threshold. The downgrade was ruled out a year ago, but it still could happen. Peru has done a lot of lobbying to stay in the EM index, as it does not want to lose the tracker money.

‘My argument is, using my own calculations based on likely MSCI Index methodology that this money only goes into three stocks, which would increase to 12 – which would be 15% of the index – if Peru moved to frontier. The broader economy would benefit over time from increased scrutiny from foreign investors.’

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Saudi Arabia

The manager expects Saudi Arabia to go onto a watch list and move straight into the emerging market index. Bell predicts this could happen in 2018 and enter into emerging market index in 2019.

‘Saudi Arabia is currently classified as a standalone market, but is essentially treated as Frontier by investors. The Saudi economy has slowed down – with lower oil prices revenues having put pressure on the fiscal deficit, international reserves and liquidity.

‘Saudi needs to diversify its economy away from oil and the 2030 Vision provides some encouragement that there clearly has been a mind shift in the kingdom,’ he said.

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Nigeria

Bell said that due to inadequate liquidity in the foreign exchange market, there is a chance that Nigeria could come out of the frontier sector and become a standalone market similar to Saudi Arabia.

‘Nigeria has struggled due to falling oil revenues, despite some positive under-the-radar developments in the country since the arrival of President Muhammadu Buhari in 2015,’ he said.

‘Nigeria would still attract investors if it exited, but this would have major ramifications for the remaining weightings in the Frontier index.’

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Oliver Bell
Oliver Bell
8/14 in Equity - Emerging Markets Other (Performance over 3 years) Average Total Return: -8.63%
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