Posted June 17, 2014 12:46 am by EMS Comments

The Financial Times has observed that according to BlackRock’s April exchange-traded product report, fund flows are starting to return to emerging markets. However, fund flows into China remain modest while there is strong investor interest in frontier markets. This leads to the question: Are there greater opportunities to be had in Asia’s frontier markets than in China?

The Financial Times article goes on take a closer look at the differences in liquidity between major and smaller Asian emerging markets along with Asian frontier markets and why this is an issue. Specifically, it was noted that if the large Asian markets of China, India, South Korea and Taiwan are removed from the MSCI Emerging Markets Index, then the remaining smaller Asian markets contribute just 10% to the index with the four most important smaller countries being Malaysia, Indonesia, the Philippines and Thailand. Kemal Ahmed, a portfolio manager at Investec Asset Management, explained that:

“As a rough rule of thumb, that 10 per cent of the MSCI emerging market index is approximately equivalent to around $390bn.”

However, the MSCI Frontier Markets Index Asia universe is several degrees of magnitude smaller contributing around 18% to the total index and including countries like Pakistan, Vietnam, Kazakhstan, Bangladesh and Sri Lanka. Ahmed explained:

“But the total value of the index is only $100bn so the Asian markets are only worth approximately $19bn. Focusing on frontier markets in Asia alone is so much more illiquid and much narrower an opportunity set than the smaller Asian emerging markets.

He also added:

“If investors want to invest in Asian markets but want to exclude either China or the other major emerging markets, the only option available to investors is a combination of smaller emerging and frontier markets.”

In addition, David Wickham, director of global emerging & frontier market equity strategy at HSBC, observed:

“We believe the most effective way to achieve good returns with relatively low risk is to invest across many disconnected frontier countries The correlation between different frontier markets around the globe is very low, which results in surprisingly low levels of volatility for the frontier markets asset class.

Wickham also cautioned:

“All of the Asian frontier markets are in close proximity to China so it’s likely their economies will be influenced by that large economy, with stock market performance potentially being somewhat correlated. That’s a riskier investment strategy than a globally diverse one.