The attraction of frontier markets has long been billed as getting returns uncorrelated to either developed or emerging markets, but oil's sharp price drop may be undermining that premise.
"The sharp drop in oil prices has played a major role in the recent poor performance of the MSCI Frontier Markets Index," Capital Economics said in a report this week. The index is dominated by a few oil-exporting countries, with Kuwait, Oman, Bahrain and Nigeria accounting for around half the index's market capitalization, it noted.
"Given that we expect oil prices to remain low, we think the [MSCI] Frontier Markets index is unlikely to outperform its emerging market counterpart significantly anytime soon," it said, noting that the frontier index had outperformed in every quarter since the end of 2012. Net oil-exporting countries account for less than 20 percent of the emerging market index, it noted.