Photo: jayhem via flickr
After emerging markets had a dismal year in 2011, many investors turned their attention to frontier markets. But in its latest note UBS suggests ‘retreating from the frontier’.Frontier markets often lure in investors because they have extraordinary growth opportunities that could eclipse those offered by more developed emerging markets.
But UBS analysts say the markets have underperformed year to date after three years of weak performance:
“In our opinion it will take a prolonged period of risk seeking by investors before inflows to the asset class resume. The risk of investing in these markets is high, including higher economic risk, political risk and liquidity risk than those in the Emerging Markets. We do not think a 10% valuation discount to GEM is sufficient compensation for these additional risks.”
UBS says frontier markets are attractive because of their low correlation to global equities which could attract some investors. But for now they recommend a long-term strategy for frontier markets.