Assessing Political Risk With Frontier ETFs

ETF Trends

Qatar and the United Arab Emirates join the MSCI Emerging Markets Index on May 30 th and over the next several months, the weight of those countries will gradually be reduced in the iShares MSCI Frontier 100 ETF (FM) .

With political risk a primary concern when investing in emerging and frontier markets, investors may want to assess political risk now that Qatar and UAE, two of the more stable Middle East nations, are moving to emerging markets status.

“While S&P Capital IQ believes the frontier-market rally is likely to proceed apace in the aggregate over the next several months, the presence of political, economic and other risks will continue to hinder upside momentum to the rate of advance in individual market returns. Among the many perilous shares markets in which to invest, Vietnam, Panama, Pakistan and Nigeria would seem to offer a measure of diversification despite their varied commitment to market reforms and, in most cases, pervasive vulnerability to political instability,” said S&P Capital IQ in a new research note.

The mention of Nigeria and Pakistan is particularly important in the case of FM because Qatar and UAE gradually see their weights reduced in that ETF, Nigeria and Pakistan will become much larger parts of the fund.

For example, Nigeria is slated to become FM’s second-largest country weight after Kuwait while Pakistan could see its weight in the ETF jump to almost 9% from 4.3% today. [Pakistan Set to be a Bigger Part of This ETF]

“Pakistan and Nigeria should remain the most highly susceptible to political instability. In the former, militant factions of Al Qaeda that occupy and dominate the border between Pakistan and Afghanistan are unlikely to cease their clandestine efforts any time soon to destabilize the regime in Islamabad,” said S&P Capital IQ.

Nigeria has own sets of geopolitical risks. An OPEC member and Africa’s largest oil producer, Nigeria is frequently home to rebel attacks on its oil assets. Earlier this year, the Global X Nigeria Index ETF (NGE) was taken to task on news Nigerian President Goodluck Jonathan suspended Central Bank Governor Lamido Sanusi. [Central Bank Flap Hits Nigeria ETF]

In March, the lone Nigeria spent some time being taken to the woodshed after militant group Boko Haram escalated violent attacks.

“Terrorist attacks in the Pakistani and Nigerian capitals should remain an unnerving phenomenon for citizens of both nations, as the random disruption of Nigerian petroleum and natural gas pipelines by the insurgency is not expected to abate in intensity for the immediate future,” said S&P Capital IQ.

Energy is NGE’s second-largest sector weight at 31.5%. Although the ETF sports a loss on a year-to-date basis, the fund has surged 10.6% over the past three months as some international investors have been lured to Nigerian stocks on valuation and the country’s recent ascent to being Africa’s largest economy. [Opportunity With the Nigeria ETF]

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