Eastern European Equities Are Leading Surprise Charge For Frontier Markets This Year 4

Asian equities have led all emerging markets this year. However, in a country-to-country comparison, indices from emerging European countries have outdone their Asian peers – analyzed in detail here. Similar to the MSCI Emerging Markets Index, European equities do not have a sizable representation in the MSCI Frontier Markets Index.

However, as far as frontier markets performance is concerned, European equities have been the frontrunners this year similar to their emerging market peers. In H1 2017, the dollar-denominated MSCI country indices for Kazakhstan, Romania, and Croatia have risen 29.9%, 21.7%, and 16.6% respectively. Meanwhile, Sri Lanka – the best performing frontier market from Asia – has returned 12.8% for the period.

The performance of European frontier markets is rivaled only by Africa, which we’ll look at in the next article of this series.

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Analyzing the markets

Of the three frontier European markets mentioned earlier, the graph below details the local benchmark index movement in H1 2017 of the following two:

  • Kazakhstan: Kazakhstan Stock Exchange Index (KASE)
  • Romania: Bucharest Exchange Trading (BET)

The reason for not looking at Croatia’s CROBEX is because its currency – the Croatian Kuna – has strengthen quite a bit against the US dollar and has been responsible for the superlative returns seen in the dollar-denominated MSCI Croatia Index. While the Kazakh Tenge and Romanian Leu have also gained against the greenback, their rise has not been as sharp as that of the Kuna.

There’s a clear trend that’s visible from the graph: the KASE is on the rise while the BET is falling.

Future prospects

From January to May, Kazakhstan’s economy rose 4.1% from the same period a year ago. The country is fueled by crude oil and hydrocarbons. Eni SpA (E) recently signed an agreement with JSC KazMunayGas (KMG) for exploration and production of hydrocarbons in the country’s Isatay block.

However, at the same time, the country is trying to diversify away from oil and hydrocarbons in order to reduce its dependence on the sectors. Timur Suleimenov, the Minister of National Economy of Kazakhstan, in June, had remarked that the country is focusing on non-extractive sectors like educational and medical services.

Further, the country is expected to benefit from China’s Belt And Road initiative as its geographic location is of interest to the Asian major and may spur economic cooperation in the future.

On the other hand, despite turning in a strong year, Romanian equities have been hammered recently because of an unexpected announcement regarding a tax overhaul for 2018 by the new Social Democrat Prime Minister Mihai Tudose.

The current prevailing flat 16% corporate tax had made Romania an attractive business destination. However, the fact that the proposed overhaul was not even discussed with local business leaders has led to copious amounts of uncertainty. Thus, the prospects of Romanian equities are somewhat dim in the short-term.

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