Smaller emerging markets’ companies are drawing interest from investors wary of wilder frontier economies but willing to delve deeper into familiar territory in pursuit of returns.
Buying shares in firms with market capitalisations of less than $3bn offers a way to tap into economies in which demand from a rising middle-class for consumer brands, telecoms and financial services is driving rapid growth.
Reuters reports that unlike risky frontier markets, many of the best opportunities are in countries already familiar to investors.
“The most exciting emerging markets are Thailand, Indonesia, Philippines and Mexico,” said Todd McClone, emerging market fund manager at William Blair, citing their low interest rates, relatively strong currencies and rising consumer confidence.
“These countries are more geared to mid- to small-cap markets.”
Investors have long been attracted to companies based in emerging economies where fast growth promises bumper returns.
But the broad emerging stock index is strongly weighted towards towards giants Brazil, Russia, India and China, whose economic performance in recent years has disappointed, and is dominated by their massive energy firms.
Just 11 companies account for the 18 per cent of the index’s market capitalisation, including Russian oil giant Gazprom and its Brazilian peer Petrobras, and South Korean technology firm Samsung.
Investors hungry for risk tend to favour smaller, less liquid stocks. Small-cap favourites include Eurocash, Poland’s second-largest distributor of fast-moving consumer goods, and Thai consumer finance company Aeon.
Demand for such exposure has helped push MSCI’s emerging market small cap index three per cent higher this year, compared with a one per cent fall in the broader gauge as a squeeze on company profits deters investors.