Pension fund managers show confidence in frontier markets

Nearly one in five (18 percent) pension fund managers believe that frontier markets have the biggest potential for equity gains over the next 10 years according to the latest poll by Baring Asset Management.

This is an increase from the last poll in October 2012 where 13 percent of pension funds estimated that frontier markets would offer the best equity returns over the next decade. Examples of frontier markets include Nigeria, Saudi Arabia, the UAE, Sri Lanka and the Ukraine.

Overall, pension fund managers have more confidence in the developing world over their developed market counterparts with a growing belief in Africa and Latin America. Compared to the results from October 2012, both reported favourability increases from seven to 16 percent respectively.

Emerging Asia remains the most popular region with 22 percent favouring the markets of China, Malaysia, South Korea, Thailand and India for equity gains, although this has dropped from 60 percent in October 2012. Meanwhile, Japan showed a steep fall to 0 percent from four percent on October 2012.

“The growing interest in frontier markets is a trend that we believe is likely to grow. Barings believes frontier markets offer the potential for strong long-term growth, in a low growth world,” Andrew Benton, head of UK and International Institutional Sales at Barings, commented.

“Low correlation with both emerging and developed markets, as well as low intra-country correlation, means that frontier markets also offer diversification benefits.

“Frontiers are markets at an early stage of development and as such they have traditionally carried higher governance risk. However, Barings believes there has been a tangible change in policy mix across these countries: democratisation has a chance of taking root in the Middle East following the Arab Spring, and there has been a general trend away from autocratic to democratic regimes in Africa.”

On equities, the research by Barings also revealed that growing macro-economic concerns mainly centre around developed markets with an increase of eight percent compared to the last survey in October 2012, in those suggesting that stagnant or negative UK GDP was the biggest challenge over the next six months (28 percent vs 20 percent).

Furthermore, nearly double believe that the UK is at risk from inflationary conditions (20 percent vs 11 percent) while 38 percent believe that US economic health is the greatest worry.

Fears around the Eurozone remain top of pension fund managers’ concerns with 66 percent citing it as the biggest hurdle. However, this does represent a decrease of 14 percent on October 2012. Furthermore, faith in potential European equity gains increased for the first time since May 2012 to four percent, having been at 0 percent in the last two polls (May and October 2012).

“With growing concerns around the capacity of developed markets, investors will continue to source opportunities in regions which they consider ‘untapped’,” Andrew Benton commented.

“Over the last 20 years, the free float market capitalisation of core emerging markets (MSCI Emerging Markets) has increased 25 fold3 and we believe that frontier markets are now positioned where emerging markets were 20 years ago, poised to become the next big opportunity in the coming years.”

Baring Asset Management launched the Baring Frontier Markets Fund in April 2013. Managed by Michael Levy, Investment Manager, the Fund seeks to achieve long-term capital growth through at least 70 per cent exposure to Frontier markets.