Demographics on the Frontier

• Frontier markets (FM) have strong population growth trends that favor solid long-term "strategic" equity returns

• Relative to Emerging Markets, FM sports lower volatility and better diversification benefits for global investors

• FM valuations are compelling and near-term technicals are favorable

• We reiterate our positive outlook on Frontier Market stocks

A Growing Frontier

Population growth in the USA is set to contribute less and less to economic growth in the coming decades, with US potential real GDP growth expected to fall as a result of an aging population. While life expectancy took a dip recently, population growth from migration has been weak while births are low relative to history. With high US equity market valuations, future returns might depend on further output efficiencies and domestic companies simply returning cash to shareholders.

It’s a different story in Frontier Markets though! Population growth is steady in the 1.5 percent to 2.0 percent range vs developed markets - who feature growth under 0.5 percent. Emerging Markets’ population growth, while at a decent current clip, has been trending down since the 1980s. The Chart of the Week displays the rate of total population growth since 1980 in Developed, Emerging, and Frontier Markets.

Chart of the Week: Total Population Growth Rates

Why does this all matter? Population growth helps support a strategic bullish case for future equity market returns in a region. Weekly Macro Themes report readers know that we turned bullish on Frontier Markets in April 2020 following its massive slide.

The iShares Frontier Markets ETF (FM) is the primary or most easily accessible play available to most investors. One of our strategic bullish FM theses is the longer-term positive demographic trend relative to Developed and even Emerging Markets.

FM’s Diversification Benefit

We recognize that this is a very long-term narrative. There will be major bumps along the way, but including Frontier Markets in one’s portfolio we believe will prove a wise decision through the decades. But it’s not all the long-term—Frontier Markets have shown themselves to be an effective diversifier to other equity sub-asset classes.

The latest Weekly Macro Themes report displays rolling 1-year correlations between (1) FM and USA stocks and (2) FM versus DM ex-US. FM is actually better than EM from both an absolute (standard deviation) and relative (beta) risk perspective. Performance-wise, FM has returned 40% over the last year versus 39% for SPY and just 21% for EEM.

Positive Technical Picture

The near-term price chart is one of the more remarkable trends you’ll see considering the events since March 2020. While EM has experienced significant drawdowns as other global equities have risen, FM has been a steady incline with only a small pullback since early June.

It’s currently testing its 2018 high from which it broke out earlier this year. Moreover, breadth is excellent across the Frontier space—our 200dma Country Breadth indicator remains very strong indicating a decent technical situation.

Conclusion

Bringing it all together, readers know that the Frontier Markets group is our favorite strategic play per our Global Equities Capital Market Assumptions. We believe FM will receive higher valuation multiples in the coming five to ten years which comes on top of a higher dividend yield than other equity areas. Currencies are always a risk in Frontier economies, so that could reduce total expected returns, but we like valuations on that front. We recently reiterated our tactical bullish 12-18 month view on FM.

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