AWARDS

39
ISSUE 24_MAY 2013 PORTFOLIO INSTITUTIONAL
Investor interest in Frontier Markets has been increasing over the
past several years as investors seek to diversify into the new sub-set
of emerging markets. Market commentators have also jumped on
the bandwagon, talking up the prospects of these new destinations.
Frontier Markets, have, however, been around for some time now.
The phrase Frontier Markets was actually coined in 1992 by the In-
ternational Finance Corporation. Back then, there were few invest-
ment opportunities in Frontier Markets, but investing in countries
like Brazil, Mexico, Argentina and Russia was considered to be ex-
otic, and very much Frontier-like. Today, Frontier Markets are still
associated with much smaller countries that in many ways are not
as risky as those that planted the seeds two decades ago.
Frontier Markets are also more associated with equity markets,
having beneted from the introduction of several indices in 2007,
and a small but growing dedicated investor base. In bond space,
Frontier Markets have no easily identiable index and no dedicated
investor base, although it appears to be evolving with the introduc-
tion of a new hard currency bond index and burgeoning investor
interest. The next frontier will be dedicated Frontier Market bond
funds.
What are they?
For starters, they are a small part of the overall emerging market
universe. Like mainstream emerging markets, Frontier Markets
are developing economies with favourable growth dynamics and in
general have moderate debt levels. Default risk is arguably low at
this stage, reecting a combination of past debt relief measures,
steady growth and prudent policies, although there are risks that
should be highlighted when assessing the prospects of frontier
markets. They typically have more political risk, are less transpar-
ent, and are at the wrong end of the scale when it comes to income,
social, and governance indicators. They have underdeveloped capi-
tal markets, little nancial intermediation, and are more depend-
ent on multilateral institutions and international donors for
nancing.
Investors will naturally demand a higher premium when investing
in frontier markets, which in theory should also compensate for in-
creased liquidity risk. Frontier Markets can ofer appeal for inves-
tors seeking higher, longer term returns compared to mainstream
emerging markets, and a low correlation with other risk assets.
Over time, Frontier Markets should evolve as liquidity improves
and risk premiums decline, much as we have witnessed in main-
stream emerging markets over the past several decades.
From a geographical standpoint, Africa is most associated with
Frontier Markets. As a region, it ticks all the boxes of a Frontier
Market, although it must be said that Sub-Saharan Africa is becom-
ing an increasing part of overall emerging market portfolios due to
the inclusion of more countries in the benchmark emerging mar-
ket bond indices.
Outside of Sub-Saharan Africa, there are a number of other coun-
tries that are considered to be Frontier Markets, including the likes
of the Dominican Republic, El Salvador, Guatemala, Sri Lanka, Vi-
etnam, Pakistan, Egypt and Iraq. These countries have been a part
of the main hard currency index for many years and therefore are
more familiar to emerging market investors compared to SSA issu-
ers, but their economic/political/social characteristics would place
them in the Frontier Market camp.
Just a commodity play?
There is no denying that a number of frontier countries have clear-
ly benetted from strong terms of trade, in particular many in Sub-
Saharan Africa. The International Monetary Fund (IMF), however,
traces the start of the growth story back to the mid-1990s, before
many of these countries were able to benet from the commodity
story. In a new paper, The Quality of the High-Growth Episode in
Sub-Saharan Africa (February 2013), the IMF notes how the high
growth has been predicated on the fact that countries got the criti-
cal basics right and avoided major policy failures. Fast-growers
have achieved macroeconomic stability, including stable and low
ination and debt sustainability, pursued sound economic policies,
and reinforced their institutions. Debt relief measures also helped.
Much like the story in Africa, Asias frontier economies have fa-
vourable growth prospects and are located in a dynamic part of the
world. Sri Lanka, Vietnam, Mongolia and Pakistan are the most in-
vestible frontier markets in the region. Sri Lanka and Vietnam lo-
cal markets would be more attractive compared to low yielding
hard currency bonds, while Pakistan and Mongolia external debt
ofers some high yield opportunities.
With an investment universe of over 50 countries, Frontier Markets
should continue to ofer attractive return prospects given their fa-
vourable growth outlook, manageable scal and debt positions,
and higher yield opportunities compared to mainstream emerging
and developed markets. We believe a dedicated frontier fund that
ofers diversication beyond hard currency sovereign bonds would
be an appropriate strategy, ofering more investment opportunities
as local markets evolve.
Frontier Market Bonds: The next generation of emerging markets
By Kevin Daly, Emerging Market Debt Portfolio Manager at Aberdeen
Important Information
For Investment Professionals Only Not For Use By Retail Investors
The above marketing document is strictly for information purposes only and should not be considered as an offer, or solicitation, to deal in any of the investments or funds mentioned herein and does not constitute investment research as dened under EU Directive
2003/125/EC. Aberdeen Asset Managers Limited does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials.
Any research or analysis used in the preparation of this document has been procured by Aberdeen Asset Managers Limited for its own use and may have been acted on for its own purpose. The results thus obtained are made available only coincidentally and the in-
formation is not guaranteed as to its accuracy. Some of the information in this document may contain projections or other forward looking statements regarding future events or future nancial performance of countries, markets or companies. These statements are on-
ly predictions and actual events or results may differ materially. The reader must make their own assessment of the relevance, accuracy and adequacy of the information contained in this document and make such independent investigations, as they may consider nec-
essary or appropriate for the purpose of such assessment. Any opinion or estimate contained in this document is made on a general basis and is not to be relied on by the reader as advice. Neither Aberdeen Asset Managers Limited nor any of its employees, associated
group companies or agents have given any consideration to nor have they or any of them made any investigation of the investment objectives, nancial situation or particular need of the reader, any specic person or group of persons. Accordingly, no warranty what-
soever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document. Aberdeen Asset Managers Lim-
ited reserves the right to make changes and corrections to any information in this document at any time, without notice.
Issued by Aberdeen Asset Managers Limited. Authorised and regulated by the Financial Conduct Authority in the United Kingdom.
ADVERTISING FEATURE
Important Information
For Investment Professionals Only Not For Use By Retail Investors
The above marketing document is strictly for information purposes only and should not be considered as an offer, or solicitation, to deal in any of the investments or funds mentioned herein and does not constitute investment research as
dened under EU Directive 2003/125/EC. Aberdeen Asset Managers Limited does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors
or omissions in such information and materials. Any research or analysis used in the preparation of this document has been procured by Aberdeen Asset Managers Limited for its own use and may have been acted on for its own purpose.
The results thus obtained are made available only coincidentally and the information is not guaranteed as to its accuracy. Some of the information in this document may contain projections or other forward looking statements regarding future
events or future nancial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make their own assessment of the relevance, accuracy and
adequacy of the information contained in this document and make such independent investigations, as they may consider necessaryor appropriate for the purpose of such assessment. Any opinion or estimate contained in this document is
made on a general basis and is not to be relied on by the reader as advice. Neither Aberdeen Asset Managers Limited nor any of its employees, associated group companies or agents have given any consideration to nor have they or any
of them made any investigation of the investment objectives, nancial situation or particular need of the reader, any specic person or group of persons. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted
for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document. Aberdeen Asset Managers Limited reserves the right to
make changes and corrections to any information in this document at any time, without notice.
Issued by Aberdeen Asset Managers Limited. Authorised and regulated by the Financial Conduct Authority in the United Kingdom.
Investor interest in Frontier Markets has been increasing over the
past several years as investors seek to diversify into the new sub-set
of emerging markets. Market commentators have also jumped on
the bandwagon, talking up the prospects of these new destinations.
Frontier Markets, have, however, been around for some time now.
The phrase Frontier Markets was actually coined in 1992 by the In-
ternational Finance Corporation. Back then, there were few invest-
ment opportunities in Frontier Markets, but investing in countries
like Brazil, Mexico, Argentina and Russia was considered to be ex-
otic, and very much Frontier-like. Today, Frontier Markets are still
associated with much smaller countries that in many ways are not
as risky as those that planted the seeds two decades ago.
Frontier Markets are also more associated with equity markets, hav-
ing beneted from the introduction of several indices in 2007, and
a small but growing dedicated investor base. In bond space, Fron-
tier Markets have no easily identiable index and no dedicated in-
vestor base, although it appears to be evolving with the introduc-
tion of a new hard currency bond index and burgeoning investor
interest. The next frontier will be dedicated Frontier Market bond
funds.
What are they?
For starters, they are a small part of the overall emerging market
universe. Like mainstream emerging markets, Frontier Markets
are developing economies with favourable growth dynamics and in
general have moderate debt levels. Default risk is arguably low at
this stage, reecting a combination of past debt relief measures,
steady growth and prudent policies, although there are risks that
should be highlighted when assessing the prospects of frontier
markets. They typically have more political risk, are less transpar-
ent, and are at the wrong end of the scale when it comes to income,
social, and governance indicators. They have underdeveloped capi-
tal markets, little nancial intermediation, and are more dependent
on multilateral institutions and international donors for
nancing.
Investors will naturally demand a higher premium when investing
in frontier markets, which in theory should also compensate for in-
creased liquidity risk. Frontier Markets can ofer appeal for inves-
tors seeking higher, longer term returns compared to mainstream
emerging markets, and a low correlation with other risk assets.
Over time, Frontier Markets should evolve as liquidity improves
and risk premiums decline, much as we have witnessed in main-
stream emerging markets over the past several decades.
From a geographical standpoint, Africa is most associated with
Frontier Markets. As a region, it ticks all the boxes of a Frontier
Market, although it must be said that Sub-Saharan Africa is becom-
ing an increasing part of overall emerging market portfolios due to
the inclusion of more countries in the benchmark emerging mar-
ket bond indices.
Outside of Sub-Saharan Africa, there are a number of other coun-
tries that are considered to be Frontier Markets, including the likes
of the Dominican Republic, El Salvador, Guatemala, Sri Lanka, Vi-
etnam, Pakistan, Egypt and Iraq. These countries have been a part
of the main hard currency index for many years and therefore are
more familiar to emerging market investors compared to SSA issu-
ers, but their economic/political/social characteristics would place
them in the Frontier Market camp.
Just a commodity play?
There is no denying that a number of frontier countries have clear-
ly benetted from strong terms of trade, in particular many in Sub-
Saharan Africa. The International Monetary Fund (IMF), however,
traces the start of the growth story back to the mid-1990s, before
many of these countries were able to benet from the commodity
story. In a new paper, The Quality of the High-Growth Episode in
Sub-Saharan Africa (February 2013), the IMF notes how the high
growth has been predicated on the fact that countries got the criti-
cal basics right and avoided major policy failures. Fast-growers
have achieved macroeconomic stability, including stable and low
ination and debt sustainability, pursued sound economic policies,
and reinforced their institutions. Debt relief measures also helped.
Much like the story in Africa, Asias frontier economies have fa-
vourable growth prospects and are located in a dynamic part of the
world. Sri Lanka, Vietnam, Mongolia and Pakistan are the most in-
vestible frontier markets in the region. Sri Lanka and Vietnam local
markets would be more attractive compared to low yielding hard
currency bonds, while Pakistan and Mongolia external debt ofers
some high yield opportunities.
With an investment universe of over 50 countries, Frontier Markets
should continue to ofer attractive return prospects given their fa-
vourable growth outlook, manageable scal and debt positions, and
higher yield opportunities compared to mainstream emerging and
developed markets. We believe a dedicated frontier fund that ofers
diversication beyond hard currency sovereign bonds would be an
appropriate strategy, ofering more investment opportunities as lo-
cal markets evolve.
Frontier Market Bonds: The next generation of emerging markets
By Kevin Daly, Emerging Market Debt Portfolio Manager at Aberdeen
ADVERTISING FEATURE