By Libby George
LONDON (Reuters) – The brand new period of unpredictability, marked by tariff threats and rising world tensions, is prompting rising market traders to search for shelter in frontier markets which can be comparatively secure from U.S. President Donald Trump’s commerce coverage shifts.
Trump’s return to the White Home put Mexico’s peso on a curler coaster, additional drained enthusiasm for international investing in China and cooled hopes of a golden period for rising markets.
So-called frontier markets are the riskiest in EM and infrequently smaller growing economies in Africa, Jap Europe, Asia and even Latin America. They are not precisely a secure be however traders say they’re robust funding locations this yr as a result of they don’t seem to be in Trump’s firing line for tariffs and different coverage shifts.
Economies like Serbia have the added attract of sturdy progress, whereas for Ghana, Zambia and Sri Lanka, emergence from debt default permits them to concentrate on reforms and progress.
“The frontier markets are prone to be extra insulated than the others, as a result of I do not assume that international locations like Nigeria or Sri Lanka or Paraguay … can be a goal anytime quickly for this administration,” mentioned Thierry Larose, an rising market portfolio supervisor with Vontobel.
“They’ve their very own idiosyncratic danger, however they’re just about proof against the risk-on risk-off affecting the mainstream rising markets,” he mentioned, calling them an “extraordinarily highly effective engine of diversification”.
For Anton Hauser, senior fund supervisor with Erste Asset Administration, belongings akin to Serbian native bonds are good bets to seize strengthening financial progress in Jap Europe.
HIGH YIELD AND HIGH PERFORMANCE?
A riskier world local weather usually sends traders dashing for safe-haven belongings akin to U.S. Treasuries, gold or German authorities bonds.
The COVID-19 disaster and the fallout from Russia’s invasion of Ukraine noticed traders ditch frontier markets of their flight to security; a number of of them tumbled into sovereign default.
However the backdrop is perhaps completely different with the famously mercurial Trump’s second presidency.
A number of the riskiest debt bets – akin to Argentine, Lebanese, Ukrainian and Ecuadorean worldwide bonds – outperformed spectacularly final yr.
Many anticipate equally idiosyncratic tales – pushed mainly by native dynamics – to drive returns once more over 2025.
“Excessive yield has additionally performed usually fairly nicely – it has been doing nicely for just a few months now,” mentioned Nick Eisinger, co-head of rising markets with Vanguard, including: “We nonetheless assume these are fascinating components of the market.”
Like Larose, he cited frontier markets, notably in Africa, as “unlikely to be systematically influenced by geopolitical or world macro components”.
Buyers cited a number of different international locations – lots of which have struggled to draw international money – together with Egypt, Nigeria and the Dominican Republic – pretty much as good targets.
Zambia, Ghana and Sri Lanka, which not too long ago emerged from debt restructuring offers, are additionally engaging bets this yr, they mentioned.
However there are some brilliant spots amongst bigger, non-frontier rising economies too, akin to Turkey and South Africa.
Turkey has turn into a preferred play for international money because it returned to orthodox fiscal coverage in 2023, and not too long ago launched into a rate-cutting cycle and may gain advantage from reconstruction in Syria and Ukraine.
South Africa, traders mentioned, is much less reliant on exporting to america, may gain advantage from falling oil costs and has a mixture of commodity exports that might assist it climate geopolitical turmoil.
“The few trades that… have stunned the previous couple of weeks have been low beta, low correlation trades with the greenback,” mentioned Marek Drimal, lead CEEMEA strategist with Societe Generale (OTC:). “Turkey is a chief instance. They have been doing fairly alright.”
Drimal additionally cited bets on international change forwards in Egypt and treasury payments in Kenya.
However it’s not a free go for all rising economies.
JPMorgan downgraded its suggestion on Panama’s bonds after Trump ramped up his menace this week to “take again” the Panama canal.
Silver-lining tales from the earlier Trump administration is perhaps much less fortunate this time, too, particularly those that benefited from diverted Chinese language commerce.
“Mexico, Vietnam, Malaysia… can be extra focused,” mentioned Magda Branet, head of rising markets with AXA Funding Managers. “Trump will look to shut these loopholes.”
