Investors get mugged – and retreat from the wild frontier

Investors who piled into small, immature emerging markets - in the hope that they could provide shelter from world turbulence. But when the credit crunch went global, investors fled.

In a crisis, there is nowhere to hide. Until last year, 'frontier markets' had been all the rage, with investors chasing compelling long-term stories in small, immature emerging markets ranging from the smaller Gulf nations and Kazakhstan to sub-Saharan Africa and Vietnam. These economies and markets, many hoped, could provide shelter from global turbulence. For eight years until last September, the MSCI Frontier Markets index had a low, 32% correlation with America's S&P 500 index, notes Merrill Lynch (a correlation of 100% would imply that the markets move in lockstep).

But when the credit crunch went global after Lehman's collapse, vicious contagion propelled the correlation to 90%. The same happened for the MSCI developed markets and emerging markets indices. Investors fled small, risky markets everywhere. "Illiquid and immature" stockmarkets got "mugged by enforced liquidation and panic selling", says Global Thematic Investors.

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