THETRADETECHFX DAILY
What should be top of mind for firms when it comes to tapping into the potential of frontier markets? As a trader, I think that top of mind should be market accessibility and liquidity. Frontier markets are tradeable, but they are not as liquid as GBI-EM index countries, given low global investor participation and a buy-and-hold approach by domestic investors. The main challenge is currency liquidity and repatriation risk as seen in Egypt and Nigeria in the past; frontier markets can face illiquidity and difficulties repatriating proceeds. Regarding market accessibility, to fully benefit from frontier markets, it is essential in some cases to open a local custody account, as settlement may require domestic processes- though some markets do allow USD settlement via Euroclear or similar platforms. On the positive side, frontier markets provide high risk premia via high carry and / or cheap currencies, which are conducive to high total returns over time relative to developed markets. Additionally, returns in frontier markets tend to remain relatively uncorrelated to developed and emerging markets, offering valuable diversification opportunities.
Historically, frontier markets have been known for their complexity, how is this developing currently? Overall liquidity has improved meaningfully in many frontier markets, although this varies by country. For example, Kazakhstan and Egypt are now much less complex from an operational and trading perspective, thanks to improved liquidity and a growing number of market participants. Additionally, recent developments show a notable improvement in market accessibility: key reforms in several frontier countries such as enhanced clearing mechanism, adoption of global standards, and regulatory liberalisation have made it easier for foreign investors to enter and operate in these markets. However, in countries such as Bangladesh or Tanzania, complexity remains high, especially when it comes to gaining local market access. In these cases, investors often use credit linked notes( CLNs), which are more complex from legal, operational, and trading perspectives than investing directly in government bonds.
When it comes to delivery issues in frontier and restricted markets, how are these being addressed? This remains one of the main challenges in frontier markets, as restricted markets may periodically impose capital controls that restrict the ability to convert local currency proceeds into hard currency for repatriation. Using non-deliverable forwards( NDFs) can be a solution, as most
Local expertise key to capitalising on frontier markets opportunities
The TRADE catches up with STÉPHANE XAVIER, emerging markets FX and rates trader, Neuberger Berman, to dissect the current state of play when it comes to frontier markets, highlighting the valuable diversification opportunities they present, decreasing complexity further opening the door to investors, and what to keep an eye on going forward.
frontier markets have active NDF markets, though these instruments have their own limitations( ISDA requirements, unclear margin rules restrictions). Diversification also benefits investors by limiting idiosyncratic shocks. There is no‘ one size fits all’ solution, as delivery issues are highly market-specific, and some constraints may remain unresolved for extended periods. Investors with local expertise have a significant advantage in navigating these issues and are better positioned to capture technical or operational dislocations.
Which restricted currencies are- or should- be getting the most airtime given the current market volatility? I think the Argentine peso( ARS) is one of the currencies that should be closely monitored given the very high market volatility since the beginning of this year. Since April 2025, the Argentine government led by President Milei has eased currency controls and moved the peso from a tightly controlled system to a managed float regime. This has allowed the peso to fluctuate within a widening band against the US dollar. Additionally, Argentina’ s system of multiple FX rates – official, MEP( onshore local securities market rate), offshore blue-chip swap( BCS), and the parallel“ blue” market – creates arbitrage opportunities but also introduces operational complexity and delivery risk for investors.
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