Frontier Markets

As global markets are developing at a rapid clip and correlating more with already-established markets, investors are looking to see where they can put their money.   Frontier markets are largely uncorrelated with developed and emerging markets, and tend to be less correlated with one another.   (See our article on this topic.)

“Recent market performance has shown that frontier markets have not been as badly hit as emerging ones in the downturn,” says Lydon.   Emerging market equity outflows hit $22 billion in the year-to-date mid-July.   Meanwhile, inflows to Africa regional equity funds have totaled $247 million.  Since the start of the year, MENA (Middle East and North Africa) funds have seen inflows every week, with net inflows totaling $1.3 billion year-to-date.   Lydon believes that the key countries to follow in among the frontier markets include Kuwait, United Arab Emirates, Poland, Croatia, Ghana, Pakistan, and Bulgaria.

Commodities/Currencies

“Until ETFs came along, it was difficult and/or expensive for investors to access the currency and commodities market,” says Lydon.  Lydon believes ETFs have made some concepts, such as futures, easy for investors to grasp. “ETFs do the legwork for investors by rolling over contracts so investors can just sit back and watch the performance,” he says.

ETFs also provide a level of diversification that would have been expensive or tricky to come by before.   For example, Lydon cites the PowerShares DB G10 Currency Harvest (DBV), which is made up of long and short futures positions for a basket of currencies. It is designed to exploit the trend that currencies associated with relatively high interest rates, on average, tend to rise in value relative to currencies associated with relatively low interest rates.

Lydon also sees a heightened interest in certain commodities, in anticipation of rising inflation. “Gold, silver and other metals-related ETFs drew massive investor attention as inflation skyrocketed for the first half of this year,” he said.  Lydon believes investors found a safe haven in these metals, and ETFs made access easy.

ETNs

Once just a small segment of the exchange traded market, ETNs have rapidly grown in number in 2008.  Last July, there were 10; at the end of July 2008, there were 89.  But Lydon says, “Investors haven’t been rushing toward them at the same pace. In July, assets in them totaled $7.2 billion.“ 

Lydon says the primary advantage ETNs offer is access to hard-to-reach markets, such as India (prior to ETFs being launched) and other countries with tight controls on foreign investment.  ETNs also offer access to certain commodities, such as platinum, which is in very tight supply, as well as certain currencies.  But ETNs also involve credit risk, since they are backed by the issuer, rather than by a pool of underlying assets.  ”This  is something that makes investors skittish in today’s markets,” says Lydon.

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