February 2026*
Frontier market (FM) performance has held up following last year’s trade upheaval. We think conditions are in place for this to continue in 2026, supported by further US dollar depreciation and improved macroeconomic fundamentals. Our allocations continue to favour beneficiaries of friendshoring (Vietnam) and the energy transition (Kazakhstan). In this Outlook, we upgrade Romania to neutral and downgrade Bahrain to underweight.
Frontier market (FM) equities started the year on a strong footing, maintaining the momentum from the second half of 2025 on the back of a weaker US dollar and the ongoing rally in Vietnamese equities. We continue to hold a bearish dollar view and expect it to be a key support for FM equities in 2026. To begin with, despite recent depreciation, valuations for the US dollar remain stretched following more than a decade of real appreciation. In addition, while the announcement of new Fed Chair nominee Kevin Warsh has added uncertainty to the rate outlook, futures market pricing continues to point to two rate cuts in 2026, which would leave the Fed with a more dovish stance compared to its developed market (DM) central bank peers. Structurally, the Trump administration’s aim of narrowing the current account deficit implies a slowdown in financial inflows into the US, removing support for the US dollar. Historically, periods of dollar weakness have coincided with FM equity outperformance relative to DM (Chart 1).
Meanwhile, global growth has held up better than expected despite higher US tariff rates due to front-loading and AI-related capex spending. Continued growth in AI investment and policy support from major economies is expected to remain supportive this year. In the event of a global slowdown – whether due to a US recession or greater-than-expected “payback” from 2025 trade frontloading – FM are in a better position given the improvement in their fundamentals since the pandemic. Fiscal consolidation, credible central bank policymaking and FX reserve building have generally reduced external vulnerabilities across the FM universe. Romania exemplifies this, having passed an ambitious fiscal consolidation package last summer. While sacrificing growth in the short term, the much-needed reforms are set to address the unsustainably wide twin deficit (Chart 2). Moreover, an improvement in the eurozone economy is a positive given Romania’s close trade ties to the bloc. Accordingly, we now hold a more balanced view, upgrading our allocation to neutral.
Another adjustment in this Outlook is downgrading Bahrain to underweight. As an oil-dependent country with a US dollar peg, it is likely to be affected by both a softer US dollar and weaker oil backdrop. While geopolitical factors have lifted energy prices recently, the net supply backdrop remains a headwind. The EIA’s projections for implied global stocks, which are expected to build as supply outpaces demand, point to further downward pressure on Brent crude prices (Chart 3). Bahrain’s elevated external debt and low FX reserves mean that it is more vulnerable to external pressures.
We maintain our overweight allocations in Vietnam and Kazakhstan as we seek to benefit from friendshoring and energy transition trends, respectively. Vietnam remains our highest-conviction overweight. The government is targeting growth of “at least 10%” this year, with elevated public infrastructure spending, tourism and FDI helping offset the likely “payback” from previous export frontloading. General Secretary To Lam, who has pushed for structural reforms collectively known as Doi Moi 2.0, cemented his position of power at the 14th National Congress in January. These reforms have so far focused on elevating the private sector as a driver of growth, streamlining bureaucracy and pushing technological advancements. On friendshoring, Vietnam’s stable politics, infrastructure push, educated labour force and geopolitical position suggest that it should continue to benefit from firms shifting away from China. Reflecting this, although softer than the highs of prior years, FDI into Vietnam is still robust (Chart 4).
In Kazakhstan, prudent fiscal policy should help rein in the current account deficit, while the surge in gold prices has helped boost the National Bank of Kazakhstan’s holdings. With large uranium reserves, Kazakhstan is set to gain from the growing demand for uranium as countries seek alternative sources of energy, particularly for energy-hungry artificial intelligence models and hyperscale data centres (Chart 5). Kazatomprom, which accounts for over a third of the MSCI Kazakhstan Index, is one of the world’s leading producers of primary uranium.
| Chg | -2 | -1 | 0 | +1 | +2 | |
|---|---|---|---|---|---|---|
| Argentina | – | |||||
| Vietnam | – | |||||
| Morocco | – | |||||
| Iceland | – | |||||
| Romania | ↑ | |||||
| Kazakhstan | – | |||||
| Georgia | – | |||||
| Pakistan | – | |||||
| Kenya | – | Bahrain | ↓ | Ukraine | – |
Note: Up/down arrows indicate a positive/negative change in our asset allocation compared to the previous outlook. A dash indicates no change. The table shows the major Frontier Markets.
Source: CLIM
*The publication reflects asset performance up to 30 January 2026, and macro events and data releases up to 6 February 2026, unless indicated otherwise.
The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.