The new 'frontier' as emerging markets get a boost from low rates

Traders work in the S&P 500 options pit at the Chicago Board Options Exchange.
Getty Images
Traders work in the S&P 500 options pit at the Chicago Board Options Exchange.

The fallout from sinking interest rates has spilled over into international markets. We're seeing frontier and emerging markets outperform on the back of lower borrowing costs.

While everyone has a theory behind the global decline in interest rates, I noted last week that falling yields were one of the main reasons emerging markets—but particularly frontier markets—have outperformed this year.

Smaller, frontier market Exchange Traded Funds (ETFs) are outperforming by a wide margin: Egypt is up 23.0 percent while Turkey has gained 20.2 percent, The Philippines is up 14 percent, Vietnam is up 7.9 percent. There are currency effects with these ETFs, but you get the point.

Yet even those markets that are arguably "emerging" are doing better. India has risen 15.0 percent, Indonesia up 18.8 percent. and Thailand is up 7.0 percent.

Compare this to the iShares Emerging Market ETF, up 1.8 percent and which consists mostly of China, India, and South Korea. A sluggish Chinese economy is the main reason more traditional emerging market ETFstied to Chinaare underperforming.

Why are other emerging and frontier markets outperforming? Besides the low interest rate environment, valuations are more compelling, particularly since developed markets are at or near new highs. Finally, while there has been some global tensions (Ukraine, Thailand) none of them has risen to the level of a truly global crisis.


1) Second-quarter earnings have a clear trend, and it's not an encouraging one. According S&P Capital IQ, 117 companies have issued guidance. Of those, 103 of those issuances are negative, 13 positive and only one in-linebringing the negative to positive ratio to a very high 7.9. Yikes!

The first quarter reports are just about finished, with 493 companies reporting. Earnings growth stands at 3.4 percent and revenues came in at 4.0 percent.

2) Chinese PMI numbers for May were better than expected, rising to 50.8 from 50.4 in April. This is good news, particularly on reports of weakness in the property sector and relatively slow first quarter growth of 7.4 percent.

--BY CNBC'S Bob Pisani

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

Wall Street