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Frontier Markets Semi-Annual Outlook

February 2021*

The Road to Reduced Restrictions

The outlook for frontier markets (FM) depends in large part on the success in combatting COVID-19 globally, defeating threats from new variants and progressing with vaccinations. Should the global economy reopen more fully in H2, FM stands to benefit from external demand tailwinds.

The backdrop for global markets has improved in recent months with the advent of effective COVID-19 vaccines and the rollout of national vaccination programmes. This could allow for a broader reopening of economies globally and a move closer to a pre-pandemic operating environment. Sectors like tourism are likely to be slower to recover given that this will require vaccinations for large swathes of populations, beyond the vulnerable. In this sense, the need for ‘vaccine passports’ could delay the recovery. New variants of COVID-19 are also a concern, though adapted vaccines can potentially tackle these. What is more, the speed of development and rollout may be facilitated by improved technology, scientific collaboration and more flexible regulatory standards.

In addition, the Biden administration is likely to implement a new stimulus bill worth some $1.9 trillion. Fiscal and monetary supports in many economies are likely to remain substantial globally. This, in turn, should support external demand for a number of FM economies.

Meanwhile, certain FM countries have controlled the outbreaks of COVID-19 well (Vietnam) and governments have delivered economic support (Kazakhstan). At the same time, others face a delay in the recovery due to reliance on tourism (Morocco) and suffered from more traditional issues like currency stability and inflation (Argentina).

Market Strategy

FM equities are attractively valued relative to emerging market (EM) peers. The 12M forward P/E for MSCI FM has fallen in recent months while that of MSCI EM has risen, leading to a widening of the P/E discount to 22% (two standard deviations below the five-year average). Part of this is due to a difference in expected earnings, with the 12M forward EPS for FM 6.6% below pre-pandemic levels while that for EM is only 0.8% lower. However, this discrepancy is unlikely to be warranted should COVID-19 restrictions begin to ease in H2. Hence, FMs could catch up and participate in a cyclical upturn given the likely rise in EPS expectations and their high exposure to financials. FM also offer a dividend yield of 3.1%, which is comfortably above that of EM (1.8%).

We make the following changes to our allocation:

*The publication reflects asset performance up to 29 January, 2021, and macro events and data releases up to 12 February, 2021, 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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© 2021 City of London Investment Management Company Limited.
All rights reserved.

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.

© 2021 City of London Investment Management Company Limited. All rights reserved.