LONDON, Jan 27 (Reuters) - In response to the new era of heightened tariff threats and global tensions, emerging market investors are increasingly seeking refuge in frontier markets that are less exposed to U.S. President Donald Trump's trade policy fluctuations.
Following Trump's return to the White House, the peso in Mexico weakened, deterring foreign investment in China and dampening prospects for emerging markets.
Frontier markets, typically the riskiest within the emerging markets category, encompass smaller developing economies across Africa, Eastern Europe, Asia, and Latin America. While not devoid of risk, investors view them as attractive investment destinations this year due to their insulation from Trump's tariff stances and other policy changes.
Economies like Serbia are appealing due to robust growth prospects, while Ghana, Zambia, and Sri Lanka, emerging from debt default, are focusing on reforms and growth.
Thierry Larose, an emerging market portfolio manager at Vontobel, noted that frontier markets like Nigeria, Sri Lanka, and Paraguay are less likely targets for the current administration's policies, providing a level of insulation and diversification. Larose described them as an "extremely powerful engine of diversification."
For Anton Hauser from Erste Asset Management, investments in assets like Serbian local bonds present favorable opportunities to capture the economic growth in Eastern Europe.
During uncertain times, investors often turn to safe-haven assets like U.S. Treasuries, gold, or German government bonds.
The unique circumstances surrounding Trump's return for a second presidency suggest a different backdrop for frontier markets.
Countries with riskier debt, such as Argentina, Lebanon, Ukraine, and Ecuador, have notably outperformed in recent times.
Expectations for 2025 indicate that localized factors will continue to drive returns within frontier markets.
Nick Eisinger from Vanguard highlighted the resilience of high yield investments and their appeal within the market. He emphasized the likelihood that frontier markets, particularly in Africa, would remain relatively unaffected by global macro factors.
Not only frontier markets but also larger non-frontier emerging economies like Turkey and South Africa have their bright spots for investors.
Panama, however, faced challenges after Trump's threats regarding the Panama Canal.
Magda Branet of AXA Investment Managers anticipates increased attention from Trump on countries like Mexico, Vietnam, and Malaysia in a bid to address trade imbalances.