London: Standard & Poor’s on 9 August launched an index for frontier equity markets containing the largest and most liquid stocks from over 30 developing markets across the world, seeking to serve risk-averse investors.
Frontier equity markets are those which are relatively small and illiquid even by emerging market standards.
The index, S&P/IFCG Extended Frontier 150, is designed to meet the needs of those investors who seek to expand into markets with potential to give returns similar or greater than other better known developed and emerging markets, S&P vice- president (Index Services) Alka Banerjee said.
The index is the first fully investable index for frontier equity markets in Asia, Eastern Europe, the Balkans, the Baltics, Africa, Middle East, Latin America and the Caribbean.
Frontier markets were previously not considered for investment by fund managers as they were dominated by companies too small and illiquid to trade.
However, global index developer S&P believes that these markets now have adequate listings and turnover and attract sufficient foreign investors’ interest to warrant the infrastructure necessary to sustain regular index calculations.
The constituents for the Frontier 150 are drawn from countries including Bahrain, Bangladesh, Botswana, Bulgaria, Cambodia, Colombia, Cote DIvoire, Croatia, Ecuador, Estonia, Georgia, Ghana, Jordan, Kazakhstan, Kenya, Kuwait, Lebanon, Lithuania, Nigeria, Oman, Pakistan, Panama, Qatar, Romania, Slovenia, Sri Lanka, Tunisia, Ukraine, United Arab Emirates (UAE), Vietnam and Zimbabwe.
Frontier markets provide opportunity for those investors who look beyond the maturing developing economies.
“Accelerating economic growth, increased government focus on privatisations and heightened IPO activity are luring foreign investors to frontier equity markets,” Banerjee said.
These markets are less exposed to swings in the global economy and less correlated with other equity markets, providing investors with distinct diversification and risk reduction benefits at a time when global markets are increasingly volatile, she added.
The data from the S&P Emerging Markets Database, was launched with constituents from 26 countries, representing an combined adjusted market capitalisation of $193.3 billion.
Colombia, Kuwait, Nigeria, the United Arab Emirates and Qatar have the highest country weightings in the new index, while Pakistan accounts for the largest number of stocks in it.
To be eligible for inclusion in the index, companies must have a float-adjusted market capitalisation of at least $50 million and a value traded of at least $25 million over the preceding six months.
The index uses a modified market capitalisation scheme to ensure that no country has a weight greater than 15% and no security represents more than 10 per cent of the index.