Evaluation-To climate Trump, rising market buyers look to the frontier

By Libby George

LONDON (Reuters) – The brand new period of unpredictability, marked by tariff threats and rising international tensions, is prompting rising market buyers to search for shelter in frontier markets which might be comparatively protected from U.S. President Donald Trump’s commerce coverage shifts.

Trump’s return to the White Home put Mexico’s peso on a curler coaster, additional drained enthusiasm for overseas investing in China and cooled hopes of a golden period for rising markets.

So-called frontier markets are the riskiest in EM and infrequently smaller creating economies in Africa, Jap Europe, Asia and even Latin America. They are not precisely a protected be however buyers say they’re sturdy funding locations this yr as a result of they aren’t in Trump’s firing line for tariffs and different coverage shifts.

Economies like Serbia have the added attract of sturdy development, whereas for Ghana, Zambia and Sri Lanka, emergence from debt default permits them to concentrate on reforms and development.

“The frontier markets are prone to be extra insulated than the others, as a result of I do not suppose that international locations like Nigeria or Sri Lanka or Paraguay … will likely be a goal anytime quickly for this administration,” stated Thierry Larose, an rising market portfolio supervisor with Vontobel. 

“They’ve their very own idiosyncratic threat, however they’re just about resistant to the risk-on risk-off affecting the mainstream rising markets,” he stated, calling them an “extraordinarily highly effective engine of diversification”.

For Anton Hauser, senior fund supervisor with Erste Asset Administration, belongings equivalent to Serbian native bonds are good bets to seize strengthening financial development in Jap Europe. 

HIGH YIELD AND HIGH PERFORMANCE?

A riskier international local weather usually sends buyers dashing for safe-haven belongings equivalent to U.S. Treasuries, gold or German authorities bonds. 

The COVID-19 disaster and the fallout from Russia’s invasion of Ukraine noticed buyers ditch frontier markets of their flight to security; a number of of them tumbled into sovereign default. 

However the backdrop may be totally different with the famously mercurial Trump’s second presidency. 

Among the riskiest debt bets – equivalent to Argentine, Lebanese, Ukrainian and Ecuadorean worldwide bonds – outperformed spectacularly final yr.

Many anticipate equally idiosyncratic tales – pushed mainly by native dynamics – to drive returns once more over 2025.

“Excessive yield has additionally executed typically fairly properly – it has been doing properly for a number of months now,” stated Nick Eisinger, co-head of rising markets with Vanguard, including: “We nonetheless suppose these are attention-grabbing components of the market.”  

Like Larose, he cited frontier markets, notably in Africa, as “unlikely to be systematically influenced by geopolitical or international macro components”.

Traders cited a number of different international locations – a lot of which have struggled to draw overseas money – together with Egypt, Nigeria and the Dominican Republic – pretty much as good targets.

Zambia, Ghana and Sri Lanka, which lately emerged from debt restructuring offers, are additionally enticing bets this yr, they stated.

However there are some vibrant spots amongst bigger, non-frontier rising economies too, equivalent to Turkey and South Africa.

Turkey has turn out to be a well-liked play for overseas money because it returned to orthodox fiscal coverage in 2023, and lately launched into a rate-cutting cycle and may benefit from reconstruction in Syria and Ukraine.

South Africa, buyers stated, is much less reliant on exporting to the US, may benefit from falling oil costs and has a mixture of commodity exports that would assist it climate geopolitical turmoil.

“The few trades that… have shocked the previous couple of weeks have been low beta, low correlation trades with the greenback,” stated Marek Drimal, lead CEEMEA strategist with Societe Generale (OTC:SCGLY). “Turkey is a main instance. They have been doing fairly alright.”

Drimal additionally cited bets on overseas trade forwards in Egypt and treasury payments in Kenya.     

Nevertheless it’s not a free move for all rising economies. 

JPMorgan downgraded its advice on Panama’s bonds after Trump ramped up his risk this week to “take again” the Panama canal.

Silver-lining tales from the earlier Trump administration may be much less fortunate this time, too, particularly those that benefited from diverted Chinese language commerce. 

“Mexico, Vietnam, Malaysia… will likely be extra focused,” stated Magda Branet, head of rising markets with AXA Funding Managers. “Trump will look to shut these loopholes.”