Frontier market debt offers idiosyncratic opportunities to investors

Frontier market debt (FMD) could give positive short-term returns, with the potential for strong idiosyncratic investment opportunities in some African countries.

A third of frontier markets are expected to see economic growth rates above 5% in the next three years, with additional support from the IMF for structural reforms and financial inflows in certain frontier market countries, such as Ghana or Egypt.

Fund manager NN Investment Partners (NN IP) said that strong investment demand for hard currency FMD had stretched valuations in the JP Morgan Next Generation Markets index of 35 countries at an early stage of development compared to established emerging markets. However, recent market turmoil has led some FMD valuations to reach more attractive levels, NN IP said. Despite trade tensions and other risks, NN IP said that it believes the medium-term picture for FMD is positive. It added that higher yields, of up to 7.1%, compared to other asset classes made a compelling case for investing in EMD.

NN IP senior portfolio manager for FMD, Yvette Babb, said: “Among many European investors there is a misconception of Africa. The continent is much more diverse than most investors perceive it to be – and even more diverse than Europe is. Contrary to broad perception, the political situation in many African countries is stable and their economies are steadily improving with politicians focusing on structural reforms.” NN IP cited government reforms and IMF support as factors for Ghana’s estimated annual GDP growth of 5.5% a year until 2023.