Harding Loevner Frontier Emerging Markets Equity Q4 2024 Report

2025-02-18 09:30:00 ET

Summary

• Frontier Emerging Markets fell 5% in Q4, mainly due to currency effects from a stronger dollar post-Trump's election, impacting Philippine and Vietnamese exports.
• Pakistan and Sri Lanka rallied on optimism over policy actions, with Pakistan benefiting from an IMF support package and Sri Lanka from successful bond restructuring.
• Real Estate underperformed due to weak Philippine property sales, while Energy performed well, driven by Pakistani oil discoveries.
• For the year, FEMs rose 6.8%, led by Financials, with strong contributions from Peruvian, Pakistani, and Sri Lankan banks, despite challenges in Africa and IT sectors.

Market Review

Frontier Emerging Markets (FEMs) fell 5% in the fourth quarter, with currency effects accounting for a significant portion of the benchmark’s losses. The dollar strengthened against FEM currencies after Donald Trump’s victory in the US presidential elections, on expectations that tariff hikes on a broad range of imports to the US will lead to inflationary pressure, prompting the US Federal Reserve to turn more hawkish and moderate the pace of interest-rate cuts.

Asia detracted the most from the benchmark, weighed down by the Philippines and Vietnam. The US is the largest export destination for both countries and their economies are viewed as vulnerable to the more protectionist trade policy expected under the Trump administration. In contrast, the smaller markets of Pakistan and Sri Lanka rallied, fueled by optimism over recent policy actions to right their respective economies. In Pakistan, the IMF’s US$7 billion support package, approved in September, should alleviate the pressure on balance of payments, while declining inflation provides the central bank with some room for interest-rate cuts. Sri Lanka successfully completed a restructuring of US$12.5 billion of sovereign bonds, reducing debt-service costs and paving the way for its fragile economic recovery to continue....

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