Why It’s Time to Invest in Frontier Markets

Frontier Stock Markets: A Rising Trend

Frontier stock markets have been among the best in the world this year, with investors betting on reforms in troubled economies such as Argentina and Pakistan, hoping they will help overcome currency issues.

Latin America and Asia Performance

The Merval index in Argentina led Latin American exchanges, showing a 53% increase in US dollars.
Similarly, Pakistan’s stock market is one of the top performers in Asia, outshining larger and more expensive markets.

Attractiveness of Frontier Markets

Investors find these frontier markets appealing for their low valuations.
On the contrary, more established markets like Mexico and Brazil saw decreases in US dollar terms, as capital was drawn towards the booming artificial intelligence stocks in the US.

Recovery in Developing Economies

Countries like Sri Lanka and Turkey, which faced tough times, are now poised for recovery, with expensive foreign currency debts and double-digit inflation rates under control.

Pakistan Stock Market Overview

The Karachi stock market has surged 30% since the beginning of 2024, surpassing Taiwan and India.
It nearly doubled in US dollar terms since June last year, after avoiding default by securing a $3 billion loan from the IMF.

Banking Sector Contribution

The banking sector played a significant role in the rally, with exceptional profits due to the central bank raising the benchmark rate by over 20% to curb soaring inflation.

Challenges and Resilience

Despite the recent bullish market, Pakistani stocks still trade at around 3.7 times their earnings, half of the historical average of seven.
Foreign inflows remain minimal, with the recovery driven by decreasing food and fuel inflation post the Russian invasion of Ukraine.

Market Fluctuations

While some frontier stock markets remained stagnant in the first half of the year due to currency devaluations, others experienced substantial growth amidst economic challenges, with inflation rates still high compared to other emerging markets.

In conclusion, frontier markets, including idiosyncratic ones like Argentina, have piqued the interest of investors seeking diversification from larger emerging markets like China.
Despite promises of reforms in certain countries, investors remain cautious due to historically low returns of emerging market stocks compared to the US markets over the past decade.