Frontier Markets Emerge as Haven Amidst Global Uncertainty
In an era marked by trade tensions and geopolitical turmoil, emerging market investors seek refuge in frontier markets immune to the vagaries of US trade policy.
Trump's Policies Drive Shift
President Donald Trump's return to office has destabilized Mexico's peso, dampened foreign investment in China, and cast a pall on the prospects for emerging markets.
Frontier Markets: Reduced Risk, Strong Growth
Frontier markets, primarily smaller developing economies in Africa, Eastern Europe, and Asia, offer relative safety from Trump's trade shifts. Additionally, countries like Serbia present robust economic growth, while Ghana, Zambia, and Sri Lanka have emerged from debt defaults to prioritize reforms and expansion.
Diversification and Insulation
Thierry Larose of Vontobel highlights frontier markets' insulation from "risk-on risk-off" dynamics affecting larger emerging markets, making them a "powerful engine of diversification." Anton Hauser of Erste Asset Management recommends Serbian local bonds for exposure to Eastern Europe's economic strength.
High Yield and Performance
Historically, frontier markets have outperformed during periods of global uncertainty. In 2023, high-yield debt investments, such as Argentine and Ukrainian bonds, have generated significant returns. Nick Eisinger of Vanguard anticipates similar idiosyncratic drivers to fuel growth in frontier markets throughout 2025.
Attractive Targets Beyond Frontier
Investors identify opportunities in non-frontier emerging economies as well. Turkey's shift to fiscal stability and its potential to benefit from regional reconstruction make it a popular destination. South Africa's reduced reliance on US exports, stable oil prices, and diverse commodity exports provide resilience.
Cautions and Opportunities
JPMorgan downgraded Panama's bonds due to Trump's threats to reclaim the Panama Canal. Experts suggest that countries previously benefiting from diverted Chinese trade, such as Mexico and Vietnam, may face increased scrutiny. However, bright spots exist in emerging economies, offering opportunities for investors navigating the uncertain global landscape.