Merrill Lynch Global Research has introduced a new frontier equity index, which is designed to identify the largest and most liquid stocks in frontier markets. A “frontier market” is a developing economy with an undeveloped equity market.
The Merrill Lynch Frontier Index is composed of 50 stocks in the frontier markets of Europe, the Middle East, Africa and Asia, reflecting 17 countries, including the UAE, Kuwait, Nigeria, Morocco, Pakistan, Kazakhstan, Vietnam and Cyprus.
Michael Hartnett, Merrill Lynch’s chief global emerging markets equity strategist, said: “The ultimate goal for many investors in 2008 is to find assets which are not closely linked to the fortunes of Wall Street. Frontier market returns are far less correlated to the performance of the S&P 500 than emerging and developed equity markets.”
In frontier markets, during the period of February 2000 to December 2007, the monthly correlation of returns for the S&P 500 was 32 per cent, compared to 73 per cent for emerging markets and 96 per cent for developed markets.
Stocks listed in the Middle East make up 50 per cent of the new index, followed by a 22.6 per cent share for Asia, 14.1 per cent for Europe and 13.3 per cent for Africa. The top three countries represented in the index are the UAE (23.1 per cent), Kuwait (18.1 per cent) and Pakistan (13.6 per cent).
Banks dominate the index (39.4 per cent), followed by financial services companies (25.7 per cent) and oil and gas firms (13.6 per cent).
The hallmarks of frontier markets include undercapitalisation and weaker regulatory frameworks, as well as lower levels of foreign ownership, borrowing and transparency.
Frontier markets have outperformed both emerging and developed equity markets since January 2000, with 20 per cent annualised returns, compared to 12 per cent for emerging markets and one per cent for developed markets. While market risk is high in frontier markets, they also have strong economic growth potential.
To be included in the index, stocks must have a market capitalisation of at least $500m, a three-month average daily turnover of at least $750,000 and a foreign ownership limit above 15 per cent. The composition of the stock index will be reviewed twice a year, in February and August.
Henry Hall, head of global emerging market equity linked sales, structuring and financing for Emea, said: “Frontier equity markets offer investors a unique opportunity to diversify their portfolio, as well as to benefit from what we believe will be the markets’ significant long-term growth potential.”
50%: The share of stocks listed in the Middle East on the new index
23.1%: The UAE’s share
Merrill introduces frontier equity index