Uncertainty Remains for Europe-Domiciled Frontier Market Funds

September 7, 2021 — London

Frontier markets hard hit by COVID-19, but investor demand has started to pick up

Investor demand for Europe-domiciled funds that invest in frontier markets has improved in 2021, but the outlook remains mixed, according to the latest issue of The Cerulli Edge―Global Edition.

Frontier markets presented opportunities for investors pre-pandemic, but the risks associated with investing in these markets are considerable, contributing to reduced investment appetite last year, says Cerulli Associates.

“The existing risks pre-pandemic combined with the uncertainty surrounding COVID-19 did not bode well for frontier market investment demand last year. Given the uncertainty around the pandemic, investors were searching for safer, less risky, investments in developed markets,” according to Fabrizio Zumbo, Cerulli’s associate director of European asset and wealth management research.

“Although flows into Europe-domiciled funds investing in frontier markets moved back to the positive territory in the first six months of 2021, the outlook for frontier markets remains mixed, as investors are still concerned about the continuing disruption brought by the COVID-19 pandemic in these markets,” added Zumbo.

Investors are apprehensive about the impact of coronavirus on the economies of frontier markets, where the rollout of vaccines is slow. Tourism, a key contributor to the GDP of many frontier markets, has been hit hard by restrictions on international travel. Furthermore, lockdowns have massively disrupted supply chains, which has affected companies in frontier markets and eroded investor appetite. Concerns over slow vaccine rollouts and continued lockdowns will persist among investors in frontier market funds for the foreseeable future, says Cerulli.

Cerulli research indicates that asset managers have not made significant changes to how and where they are investing in frontier markets. Managers remain committed to investing in companies that focus on themes such as financial inclusion, healthcare, and digital. Investors are particularly interested in African frontier markets due to the continent’s underdeveloped infrastructure and growing middle class.

Other Findings:

  • In the U.S., the recently introduced pooled employer plans (PEPs) and state-sponsored retirement plans (SSRPs) could create new momentum for smaller recordkeepers. In time, PEPs could become a compelling option for small employers and, with 46 of the 50 U.S. states either adopting or considering SSRPs, more small businesses are likely to have access to this option soon. In many ways, SSRPs can serve as retirement plan “training wheels” for small employers that will in time graduate to more complex retirement plans. For recordkeepers, this represents an opportunity to retain these organizations as clients at a critical point in the evolution of their benefit programs and their growth as employers.
  • In Asia, the rivalry between Hong Kong and Singapore has extended into the green investing and wealth management arenas. Given the positive outlook for wealth management in the region and continued regulatory efforts, Cerulli believes there are good opportunities for both the Fragrant Harbor and Lion City to gain significant portions of the global high-net-worth pie. Asset managers in both financial hubs can win business from family offices by developing relationships with private banks either directly or through their institutional teams.

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Note to editors

These findings and more are from The Cerulli Edge—Global Edition, September 2021 Issue.

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