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Nicholas Kitonyi
Nicholas Kitonyi
Articles  | Author's Website |

Are Frontier Markets a Good Addition to Your Portfolio?

Singapore might be a good place to start looking

February 14, 2018 | About:

The CBOE Volatility Index (VIX) has recovered after falling to the lowest level in history early this year to top 35 basis points before pulling back to the current level of 20 points. This reflects just how volatile the U.S. markets have become over the last few weeks with stock prices almost mirroring the swings in the cryptocurrency market.

However, for the better part of the last six months, the VIX remained significantly low and stable, which falls in line with the trend of the previous 12 months when it oscillated between 10 basis points to 15 points. The year 2018, however, appears set for different volatility levels if what we have witnessed in the last couple of weeks is anything to note.

Last year, most investors would have taken a long-term approach when making their investment decisions because low volatility indicates market stability. And given the fact stock prices rallied constantly recording new all-time highs as per the S&P 500 Index, the Dow Jones Industrial Average (DJIA) and the NASDAQ Composite numbers, investors would have held a significant level of optimism in the market.

Currently, the elevated levels of volatility depicted in the GuruFocus chart below suggest that some investors will be looking at investment opportunities in the market with a degree of caution.

CBOE Volatility Index (VIX) Chart via GuruFocus Economic Indicator Charts

So, how do you balance this exposure for optimal returns? Beyond looking at U.S. ETFs like the SPDR S&P 500 ETF (SPY), commodities and other securities that provide some compelling risk-reward trade-offs, investors might as well look at opportunities in the frontier markets.

The emerging markets present some interesting opportunities as they transition to developed economies. However, the frontier markets in South East Asia, the Caribbean, Africa and some parts of Middle East, are currently characterized by growing urbanization and boast exciting demographics with a growing workforce, and high population with a middle-class economic status.

Some of the countries in these regions have already demonstrated to the world that their economies are significantly stable despite their high economic growth rates compared to developed economies. In fact, some shrewd investors already view these economies to be good candidates for their next investment.

Take, for instance, Singapore, which was recently ranked the top country in Asia for attracting and retaining talent because of its government policies support economic growth. It is becoming one of the hottest destinations of foreign investors. While Singapore immigration policies are deemed more complex than in several Asian countries, it is still among the top nations attracting applications for permanent residence as investors move swiftly to invest and set up businesses.

The country has topped the World Bank’s ease of doing business ranking in the region since inception because of its open trade policy. Its political risk level of about 1.6 (based on -2.5 the worst to 2.5 the best) is well above its historical average of 1.22, which again makes investments in the country more attractive to foreigners.

Its economic growth of about 2% to 3% is also higher than the global average for developed economies of about 1.5% to 1.8%. Again, when this is factored to the ease of doing business in the country and the low political risk, makes the risk-reward trade-off more attractive than in most developed countries.

Urbanization, literacy levels, and low political risk are some of the main items that investors look at when investing in the frontier markets. Singapore appears to have delivered on all three.

Most South East Asia economies have similar numbers and the same scenarios are also seen in a few economies in the Caribbean market, Middle East, and Africa, according to the World Bank data. Some of these markets may harbor higher political risk or stricter rules of doing business than others and thus individual analysis of each may be required before investing. In this write-up, I have narrowed down to Singapore just as an example, so it is correct to say that there could be better opportunities out there that investors can use to balance their portfolios.

About the author:

Nicholas Kitonyi
Nicholas the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on research sites like Seeking Alpha and Benzinga.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. As a trader, Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website

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