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Frontier Markets Semi-Annual Outlook

August 2020*

For Better, for Worse

Frontier markets (FM) face similar headwinds to the rest of the world with the outlook dominated by the trajectory of COVID-19. There is an increasing likelihood of the virus persisting as a public health concern, meaning that any recovery is more likely to be “W-shaped”, rather than “V-shaped”. This is somewhat magnified in a number of FM countries due to weak health infrastructure, low incomes, a lack of social safety net and high levels of informal activity, but it would be wrong to assume that this is the case across all FMs.

There are a number of countries that have been exemplary in managing the virus, including Vietnam, which reported no deaths for six months after its first confirmed case. Similarly, Sri Lanka has been a pioneer in developing a tracking system that has been adopted by a global platform.

This is not to take away from the huge economic and social challenges these countries face. All but a handful of economies are set to contract in 2020 and the rebound remains uncertain and somewhat at the mercy of external demand from larger economies. A number of countries are also likely to suffer from reduced tourist flows and a prolonged slump in associated sectors, which means that income support for households may need to be increased and duration lengthened. These policies may also be needed in order to avoid social unrest. In addition, the collapse in the oil price may be positive for some but for Nigeria, in particular, it has made existing economic problems acute.

The health and economic policy response to COVID-19 in many countries has been swift and strong. Governments locked down reasonably quickly after the first cases were confirmed and this helped limit the spread of the virus. This came at a substantial economic cost and most governments acknowledged the need for support for households and businesses during the pandemic. Some countries, like Morocco, have even been innovative in their policy implementation and have used mobile cash payments to get money to those in need quickly. Central banks have also generally been quick to offer support via a number of routes, including rate and reserve requirement cuts, refinancing operations and FX swaps and even quantitative easing.

Aid from multilateral institutions has been sought by a few FMs. The amounts have thus far been small, but some countries will likely need to seek a fuller programme. Aside from delivering immediate aid, this may push reforms through in countries that may not have implemented them of their own accord. More broadly, easy financial conditions should provide a supportive backdrop for FM economies.

Market Strategy

MSCI FM has lagged both MSCI Emerging (EM) and developed markets so far this year and in the rally since the lows in March. However, it did outperform by some 5-7% points during the peak to trough falls in February to March. FM faces headwinds that may be more pronounced than other asset classes, with oil-exporting countries accounting for around a fifth of the index. At the same time, it also has countries that have led the way in containing COVID-19 like Vietnam, which we keep at overweight. Meanwhile, other countries have made progress on long-standing issues, with Argentina potentially securing a deal with creditors to restructure its debt.

*The publication reflects asset performance up to 31 July, 2020, and macro events and data releases up to 7 August, 2020, unless indicated otherwise.

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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.

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City of London Investment Management Company Limited (“CLIM”) is authorised and regulated for the conduct of investment business within the UK by the Financial Conduct Authority (FCA), registered as an Investment Advisor with the United States Securities and Exchange Commission (SEC) and regulated by the Dubai Financial Services Authority (DFSA). Registered in England and Wales No. 2851236. Registered Office: 77 Gracechurch Street, London, EC3V 0AS, England.

© 2020 City of London Investment Management Company Limited. All rights reserved.