Have frontier markets lost their mojo?

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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.

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"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.

The MSCI Frontier Markets 100 Index is down around 6 percent so far this year, and off nearly 19.6 percent over the past three months, while the MSCI Emerging Markets Index is off around 8.7 percent over the past three months.

Not uncorrelated after all?

Frontier markets' underperformance appears to fly in the face of one of the primary reasons many investors have shoveled money their way in recent years: they're believed to offer diversification benefits, with performance uncorrelated to other global markets. Investors had been betting on the rise of a middle class and increased consumer spending in frontier markets.

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"It's not necessarily a rule that frontier markets are uncorrelated," said Rajiv Biswas, chief economist for Asia Pacific at IHS. "It's part of a broader selloff," he said, noting investors are pulling money out of equities globally and parking it in safer havens, such as U.S. Treasurys.

Developed market stocks have also been under the weather recently, with the S&P 500 down around 3.6 percent this month, while the Euro Stoxx 600 index is down around 2.7 percent over the same period. The 10-year U.S. Treasury yield fell to around 2.06 percent in Asian trade Wednesday, from around 2.34 percent at the beginning of December. Bond yields move inversely to prices.

Uneven spread

But Biswas doesn't believe the malaise is spreading to all frontier markets equally, citing relatively stable performance from Vietnam's market. The VN Index is still up around 2.8 percent so far this year, despite falling more than 3 percent on Wednesday.

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Capital Economics also cited some differentiation in the segment.

"The outlook for equity markets in a number of smaller countries included in the Frontier Markets Index is more favorable," it said, noting countries in the Frontier Markets Index tend to have faster economic growth than their emerging market peers over the past decade. "Growth prospects are particularly bright for Morocco, Kenya and Sri Lanka," it said.

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But it had a caveat.

"Strong growth does not necessarily translate into higher returns," Capital Economics said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1