Frontier markets with managed exchange rates from Dubai to Vietnam and Nigeria are luring equity investors fleeing the currency turmoil in larger developing economies.
Funds that buy shares in the less-developed nations posted inflows of $407 million in the first six weeks of 2014, while $21 billion was pulled from emerging markets, EPFR Global data show.
A gain of more than 3 percent in the MSCI Frontier Market Index this year pushed stocks to a 2008 high Feb. 19, even as slower China growth and the Federal Reserve’s plan to trim bond buying weighed on developing and developed-nation gauges.
Benchmark stock indexes in the United Arab Emirates, Qatar and Vietnam, whose central banks control local currencies, are among the 10 best performers this year within global equity gauges tracked by Bloomberg.
While investors dump emerging-market currencies including the Turkish lira, Hungary’s forint and Brazil’s real, bourses in those nations languished with the world’s worst performers in 2014.
“Half of MSCI frontier have effectively fixed exchange rates to the dollar,” Charles Robertson, London-based global chief economist at Renaissance Capital, said. Strong economic growth also heightened interest, he said.
Equities in Qatar, the world’s largest exporter of liquefied natural gas, have rallied 14 percent this year, while Abu Dhabi’s gauge has gained 15 percent and Dubai’s benchmark posted returns of 24 percent, the most among 50 of the world’s largest equity markets.
The Persian Gulf countries keep their currencies pegged to the dollar because earnings from energy exports are denominated in the U.S. currency.
Persian Gulf “markets enjoy a current account surplus and have never relied on global financing,” Rami Sidani, the Dubai-based head of Middle East and North Africa investments at Schroder Investment Management Ltd., said. “Their dollar-based economies mean that they do not present any currency risk.”
Fixed exchange rates have also helped spur a rally in Tunisian and Vietnamese shares this year, Sidani said.
Nigeria’s benchmark stock index has fallen 6.1 percent this year as the central bank comes under pressure to tap into reserves and defend the naira. The currency touched a record low versus the dollar yesterday as the government suspended central bank Governor Lamido Sanusi.
Pegged exchange-rates may “get overvalued relative to peers, thereby undermining the country’s competitiveness,” Benoit Anne, head of emerging-market research at Societe Generale in London, said by e-mail on Feb. 18.
“Frontier-market countries in general are still in the sweet spot of their economic cycles versus a number of emerging markets ,” Andrew Brudenell, a London-based money manager at HSBC Global Asset Management, which oversees about $550 million in frontier markets, said by e-mail Feb. 18.