Norway’s Frontier Gamble Will Bolster Market, HSBC Says

Norway’s decision to have its $890 billion sovereign wealth fund boost investments in frontier markets will probably attract more institutional investors to the asset class, according to HSBC Holdings Plc.

The sovereign wealth fund, which is the world’s largest, said in a strategy report yesterday that it will target more frontier markets and include additional currencies to generate higher returns. MSCI Inc.’s gauge of stocks in the smaller developing nations has gained 16 percent this year, more than triple the 4.5 percent return on its emerging markets Index.

Investors have sought stocks in the least-developed markets as the Federal Reserve pledges to keep U.S. interest rates low and the largest emerging economies sputter. While expansion in Brazil, Russia, India and China led the world out of the 2008 financial crisis, Brazil had its credit-rating cut for the first time in a decade this year and growth in Russia has been squelched by international sanctions and slumping investment.

“More investment like this from large global institutions should help deepen the frontier stock markets and encourage new local businesses to list, which in turn can broaden the investable market,” Andrew Brudenell, a London-based money manager at HSBC Global Asset Management, which oversees about $550 million in frontier assets, said by e-mail yesterday. Frontier economies “are diverse and less correlated to the world’s financial health than emerging markets and most are still in the upwards phase of their economic cycles,” he said.

‘Less Cowboyish’

The smallest developing nations have equity markets that are less established than emerging markets. The countries MSCI lists in its measure include Argentina, Ukraine and Kazakhstan.

Norway’s fund, which owns about 1.3 percent of the world’s stocks, has failed to meet a 4 percent real return target since it started investing in the late 1990s. Norges Bank Governor Oeystein Olsen, who oversees the fund, has said it must take on more risk to increase returns.

The fund has yet to invest in many countries in Africa and the Middle East, Yngve Slyngstad, chief executive officer of the fund, said in a telephone interview yesterday.

Mark Mobius, who oversees $50 billion in assets as chairman of Templeton Emerging Markets Group, said last month that Africa is leading growth among frontier markets.

Norway’s pivot to frontier economies is a sign the asset class is gaining more credibility among investors, said Mohammed Hanif, the chief investment officer at London-based Insparo Asset Management, which oversees about $170 million.

“They are smart investors and long-term investors as well,” he said. “They see a long-term value story. It’s a sign of the investor base maturing, which is reflective of those markets becoming less frontier, less cowboyish.”