We have spent a lot of time over the last few years making the case for investing, in a very active way, in frontier and smaller emerging markets on the basis of high growth, low foreign ownership, low levels of analyst coverage creating proportionately more Alpha generating opportunities, and due to some of these factors, lower correlations with developed and larger emerging markets along with more resilient performance in times of global market stress.
However, since the start of the COVID-19 pandemic frontier and smaller emerging markets have demonstrated less resilience than we would have expected. This paper attempts to set out some possible explanations for why this has occurred and whilst not presuming an ability to predict when and what “normal” looks like going forward, will highlight the signposts that we are looking out for, that would direct performance in a more positive direction.
We start with a brief look at performance before COVID-19 started to impact equity markets earlier this year. We have used 20th February 2020 as the day that equity markets started to significantly react. The chart below shows the 5-year period leading up to that date and the performance of the Frontier Markets Strategy versus other major equity asset classes.