Frontier Markets: Investors Double Up on Risk

Money is flowing out of risky emerging market stocks (NYSEARCA:VWO), and guess where it’s going? Into even riskier frontier market debt and stocks (NasdaqGIDS:PMNA).

The Economist reports:

“Investors in America and Europe were hungry to buy dollar-denominated debt offering juicy yields. Zambia drew $12 billion of orders for a ten-year bond paying only 5.4%. Pension-fund trustees and consultants now ask how much money they should allocate to the frontier.”

Frontier markets (NYSEARCA:FM) are tiny undeveloped countries whose stock market is typically small, risky, and illiquid. Sometimes referred to as “pre-emerging market countries,” Argentina (NYSEARCA:ARGT), Egypt (NYSEARCA:EGPT), Nigeria (NYSEARCA:NGE), and Kuwait are among the countries in this category.

What made emerging market stocks a source of excitement in the 1990s has now found a new place in volatile and unestablished frontier markets, according to Charlie Robertson at Renaissance Capital.

High risk taking along with excessive leverage is associated with market tops.

A contraction in risky investment behavior, not an increase, is the sure sign of a correction and possible bottom. And by that measure, frontier markets in their present state have a long way to go.

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