Frontier markets such as Kenya, Nigeria, and Egypt are catching the attention of bond investors due to their high real interest rates and currency liberalization efforts. These markets have witnessed significant policy shifts, with central banks in these countries raising policy rates and taking steps toward market liberalization.
Notably, Nigeria has made moves to allow free trading in its currency, the naira. These policy adjustments aim to address inflation, partly driven by currency depreciation, and demonstrate a commitment to financial stability and orthodoxy.
The aggressive monetary policies have spurred demand for local-currency bonds in Kenya and Egypt, with Nigeria expected to follow suit. Goldman Sachs Group Inc. observes that ex-ante real rates in these markets have moved into positive territory, offering a growing yield advantage compared to developed markets, which are beginning to reduce rates.
According to Peter Marber, chief investment officer for emerging markets at Aperture Investors, countries like Egypt, Nigeria, Argentina, and Turkey present appealing opportunities due to currency devaluations and high yields.
Despite the potential rewards, investing in frontier markets comes with challenges, including a history of policy reversals in countries like Nigeria and Zimbabwe. Bloomberg’s chief emerging-market economist, Ziad Daoud, emphasizes the importance of removing capital restrictions and providing positive real interest rates to attract international investments.
However, recent policy measures in Nigeria, such as a significant rate hike by the central bank, have led to a stabilization of the naira and a shift towards more orthodox policies, sparking optimism among analysts like Andrew Matheny of Goldman Sachs.
Investors are advised to adopt selective strategies, focusing on markets demonstrating positive developments and reform momentum. Barclays Plc and Deutsche Bank recommend buying dollar bonds and local debt in Egypt and Nigeria, respectively, citing the potential for rating upgrades and attractive yield levels.
Bank of America Corp. sees opportunities in the external debt of Pakistan and Sri Lanka while recommending Guatemala’s 2050 bonds in Latin America due to a potential reversal of political risk premium with new leadership.
Overall, analysts and investors remain bullish on frontier markets, especially those showing signs of positive economic reforms and policy stability.
