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Investors Seek Refuge in Frontier Markets Amid Global Economic Uncertainty

The current landscape of global investing is heavily influenced by unpredictable factors, including escalating trade tensions and changing economic policies under U.S. President Donald Trump. These dynamics are prompting investors, particularly those focusing on emerging markets, to explore opportunities in frontier markets that appear more insulated from recent swings in trade policy.

With Trump’s re-election, the Mexican peso has experienced significant volatility, dampening investor enthusiasm for Chinese markets and influencing perceptions of opportunities in emerging markets as a whole.

Frontier markets, characterized as some of the riskiest segments within emerging markets, typically encompass smaller economies in regions such as Africa, Eastern Europe, Asia, and Latin America. Although these markets carry their own risks, investors view them as appealing destinations in the current climate, as they remain largely unaffected by the tariff threats and policy changes associated with Trump’s administration.

Notably, countries like Serbia are benefitting from strong economic growth, while others such as Ghana, Zambia, and Sri Lanka are emerging from debt default situations, allowing them to concentrate on reforms and future growth trajectories.

Thierry Larose, an emerging market portfolio manager at Vontobel, notes that frontier markets are likely to remain more insulated than larger emerging economies. He emphasizes that countries like Nigeria, Sri Lanka, or Paraguay are not expected to become targets for U.S. tariffs in the near future, making them compelling options for investment diversification.

Anton Hauser, a senior fund manager with Erste Asset Management, identifies Serbian local bonds as prime candidates for capitalizing on strengthening economic conditions in Eastern Europe. His perspective highlights a potential shift toward local dynamics driving market performance.

High Yield Potential and Local Opportunities

A shift in global investor behavior often leads to a flight towards traditional safe-haven assets such as U.S. Treasuries, gold, or German bonds. Historical events like the COVID-19 pandemic and Russia’s invasion of Ukraine prompted significant withdrawals from frontier markets as investors sought security; these circumstances resulted in multiple cases of sovereign defaults among smaller economies.

However, the current political climate, particularly during Trump’s second term, might present a unique opportunity for certain high-risk investment strategies. Last year, bonds from countries known for their economic challenges, such as Argentina, Lebanon, Ukraine, and Ecuador, unexpectedly performed well, indicating that local factors could again influence positive returns in 2025.

Nick Eisinger, co-head of emerging markets at Vanguard, remarks on the ongoing appeal of high-yield investments, noting a trend of resilience in this sector. He echoes sentiments shared by Larose regarding frontier markets in Africa being less susceptible to broader geopolitical and macroeconomic fluctuations.

Investors are looking at various countries, including Egypt, Nigeria, and the Dominican Republic, as potential targets for new investments. Zambia, Ghana, and Sri Lanka, having recently navigated debt restructurings, also present compelling cases for investment this year.

Amidst this frontier market focus, larger non-frontier emerging economies like Turkey and South Africa are also garnering attention. Turkey has increasingly attracted foreign investment after adopting more orthodox financial policies and initiating a rate-cutting cycle. Its potential role in reconstruction efforts in Syria and Ukraine further enhances its investment appeal.

South Africa, with its diverse commodity exports and reduced dependence on U.S. markets, may benefit from falling oil prices and has shown resilience against geopolitical disruptions.

Marek Drimal, lead CEEMEA strategist at Societe Generale, emphasizes the recent performance of certain trades that exhibit low beta and low correlation with the dollar, highlighting Turkey as a noteworthy example. He also mentions opportunities in foreign exchange forwards in Egypt and treasury bills in Kenya.

Nevertheless, not all emerging economies are poised for success. Recent warnings from JPMorgan regarding Panama’s bonds, prompted by heightened rhetoric from Trump regarding the Panama Canal, serve as a reminder of the risks present even in potentially lucrative markets.

Magda Branet, head of emerging markets at AXA Investment Managers, offers a cautionary note, suggesting that countries like Mexico, Vietnam, and Malaysia may face heightened scrutiny under the current administration, as efforts to close perceived trade loopholes are likely to intensify.

Source
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