5 February 2026 (pre-recorded 28 January 2026)
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[INTRODUCTION]
Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. This week we’re introducing you to a newly rated fund and the intriguing world of frontier markets, the fastest-growing, yet often overlooked segment of the global economy.
James Yardley (JY): I’m James Yardley and today I’m joined by Johannes Loefstrand, fund manager on the T. Rowe Price Frontier Markets Equity fund. Johannes, thank you very much for joining us today.
Johannes Loefstrand (JL): Thank you for having me, I look forward to his discussion.
[INTERVIEW]
JY: Yes, now Johannes, I mean, you’ve got a very interesting job with frontier markets. Can you explain to the listeners what are frontier markets? How do you define that? What countries are we talking about here and why should investors perhaps consider them?
JL: Great question. Yes. So frontier markets, as the name would would imply, is any country which is not developed nor emerging. So it’s the level below emerging markets. This include places like Vietnam, Morocco, Romania. They don’t necessarily have lower GDP per capita than in Indonesia or in India, but they tend to be smaller in size and less liquid, and therefore less efficient. But that doesn’t mean that they don’t have incredibly dynamic companies in this region. As a whole, frontier markets is actually the fastest growing cluster of countries in the world, which is very exciting for a stock picker like myself.
JY: And I guess frontier markets, they have existed for a while. I mean, what’s changed recently, and I think an investor naturally thinks it’s very high risk. Is that true or is that a bit of a misconception and or is that risk offset by potential opportunities?
JL: Yeah, so there’s a lot to unpack in those questions. Taking a step back, the first thing I would say that there are really three reasons why I believe a global investor should have exposure to frontier markets. The first one is that it provides a very fertile ground for active stock picking. These are some of the most efficient stock markets in the world, but the companies are often very dynamic and in those in our portfolio tend to have very high standards of corporate governance and valuations because these markets are very inefficient, are very attractive, unlike what we might see in developed markets in many emerging markets.
For instance, there is a bank in Kazakhstan that we’ve been invested in for well over a decade that has returned exceptionally strong shareholder returns, but they still repay us nearly 15% dividend yield every year. So it’s completely overlooked. So you have these hidden gems in this really fast growing cluster of countries.
The second reason, which addresses your question as to whether, you know the risk of frontier markets is true or amis, is that actually as a region, it’s been the least volatile of any equity index. So if you associate volatility with risk, then bizarrely frontier markets has actually been safer than any other region. And the reason for that, it’s not that Vietnam is not volatile or that Bangladesh is not volatile or Morocco or Romania, but it’s because these countries are not connected to global liquidity flows.
What I mean is, if we use developed markets as an example, if Nvidia is up 10% today, I would be able to bet you money that TSMC in Taiwan will be up 5% and ASML in the Netherlands will be up at least 5%. However, if it tech stock in Vietnam is up 10% today, I have no idea how it will react in Morocco or in Romania or in parts of Latin America. That means that on a portfolio level, actually the volatility is very low because they cancel each other out. And that’s a fascinating aspect of frontier markets. So if you want to have exposure to something with low volatility and also low correlation to developed in emerging markets, then frontier markets has a natural home in your portfolio.
And finally, I would emphasise that frontier markets actually encompasses 36% of the global population and a sixth of global GDP, which also happens to be the fastest growing part of global GDP. So if you want to have complete global exposure as an investor, then having at least a small allocation to frontier markets makes sense in my view.
JY: Fascinating. Now, I think you’ve made some really interesting points there. I mean, the diversification aspect I guess I hadn’t really considered, but so much of the financial world is so connected. So to have that diversification benefit is a huge advantage. I guess another potential benefit is that if these countries do well and they eventually graduate to the emerging markets universe, presumably you get quite a big uplift when more investors come in and have to buy the shares or have a look at the shares as well. Has that happened recently with any countries?
JL: So we haven’t had a significant upgrade in quite some time. But if we go back a couple of years there were substantial upgrades into emerging markets such as UAE and Qatar. Saudi Arabia went from a standalone market where we could invest into emerging markets. And all of those index inclusions led to equity rallies into that. And we benefited from that greatly. As frontier markets investors, there will be inclusions in coming years. And that will be important. And you know, we will also have countries that are downgraded from emerging markets into frontier markets. And what often happens then is that you have this capital outflows as passive funds are selling, and that often gives us opportunities to buy stocks at very attractive valuations. So we as the last one on the ladder, we benefit both from inclusions and exclusions.
JY: Yeah, it sounds a bit like a stock pickers paradise in terms of the inefficiencies in the market. So what kind of companies are you actually buying here? Because obviously these countries are not necessarily as developed as the rest of the world. You’re probably not gonna find many Nvidia’s in them, I wouldn’t think. But maybe there’s more than we imagine. I mean, I imagine it’s fairly heavily dominated by financials and banks and that sort of thing. Is that perception right? Or is that wrong?
JL: That’s true. The financials is a very important part of the index accounting for nearly 40% of the opportunity set. However, it is much more dynamic than people realise. For instance, Vietnam; people associate with it being a very poor country, but it’s developing at an extremely rapid pace, and the depth of the stock market is far greater than people appreciate. So the turnover on the stock market has recently been a size one and a half billion dollars a day, which is nearly fivefold out of let’s say Mexico.
And within Vietnam, and this is just one of many examples, right? There’s 1,700 listed stocks and there are certain tech names there that exhibit features that we saw of those in Taiwan 25, 30 years ago. So if you want to be early with finding these opportunities there’s definitely some gold dust to be found in frontier markets.
But generally speaking, financials is a big proportion. And banks in these countries tend to be quite straightforward. They’re the engines of the economy and those that have succeeded tend to have good corporate governance because if they haven’t been underwriting loans, well historically, they’ve typically taken excessive risk and they wouldn’t still be around. But it’s very important to research these companies and it’s very important to stay on top of exactly what’s happening. And that’s why we travel so much.
Personally, I travel probably an average to one country every month. This job has taken me to nearly 60 different countries around the world. So it’s been a true privilege to be part of…
JY: So a pretty good job to have if you like traveling.
JL: It’s a traveler’s dream. But my wife might disagree.
JY: Yes, but so you get to visit a lot of these companies on the ground and things. I mean, I guess that’s the advantage of working for someone like T Rowe. You’ve got those resources to do that then.
JL: Indeed, yes. We have 1.8 trillion under management and we truly believe in active investing. And to be a good active investor in this markets, you have to travel. This is the last region in the world that will be disrupted by AI because there’s so little sort of digital information. So we need to go and visit the companies on the ground. You need to see their facilities, their factories, see how they treat the stakeholders not only employees and minority shareholders like ourselves, but also how they treat the society at large and ensure that our money is being, you know, prudently taken care of by these businesses.
JY: And do you think this can be quite a good counterbalance then in people’s portfolios to the AI stuff which is going on? I mean, if there’s so many correlated trades out there with AI, is this is something which is kind of independent of that, you would say?
JL: Absolutely. So for context, this is the cheapest region in the world right now in terms of PE multiple, so price to earnings ratios and actually over the last five years.
JY: Can you give us some rough numbers on that just generally?
JL: I could indeed. So frontier markets and last time I checked had a PE multiples of around nine and a half times. And historically it’s been above 10 times well above 10. And that’s actually lower than any other major equity index. And it’s interesting that from the marks have become cheaper over the last five years because the performance has been quite good. And that implies that that earnings growth in currency terms and dividends have far exceeded the multiple D rating to generate this return. So within the last five years our strategy is up by nearly 90% in pound terms. And that’s then despite the multiple D rating.
JY: And what are the long term drivers for the region and what areas are exciting you most at the moment?
JL: Sure. So I haven’t been this excited about frontier markets for a long time. I’ve always been an optimist of course, and we’ve done well. But what makes this a really interesting time to invest in frontier markets is that geopolitics have reshaped the world and less money is now being allocated towards developed markets, and we’re seeing money coming back to this region.
And if there are so many themes we can play: you have an emerging middle class, you have commodity prices going up in certain markets like the copper prices up that benefits countries economies, like Peru. Then what we can see in developed markets is the digitalisation and AI that will enable these banks to be far more efficient and that will unlock further capital to deploy. There are plenty of opportunities and what we’ve observed is that if this trade war and this uncoupling of the major global supply chains have positive spillover effects.
So as companies and countries want to diversify, they move factories into places like Vietnam or if you’re in the EU and you’re becoming more cost conscious, you’re building the next factory in Romania as opposed to say Germany or Sweden. So we are seeing a far greater interest and we’re seeing liquidity conditions improving. And importantly, if you look back historically and look at correlations, frontal markets have been some of the most geared countries in the world towards a weakening dollar. And if that’s what we’re seeing, then we can finally see a multiple re-rating of many stocks.
If you think about the three drivers to stock returns, simplistically you have earnings growth in hot currency, dividend yield, and multiple expansion. Now we’re seeing earnings growth in many cases accelerating. We’re seeing the dividend yield being high as, as mentioned before, valuations are very attractive, and the multiple has now a potential to just revert towards means. Whereas many other regions in the world are now trading far above historical valuations, frontier markets are displaying valuations that are below. So hopefully that implies that we could see a partially recovered there. But even in the absence of a multiple re-rating, we will still see really solid earnings growth and we will be paid generally by these companies in terms of dividends.
JY: Very interesting. Yeah, I think it’s clear, isn’t it, that recently the US dollar has been weakening. We’ve obviously seen it and with the geopolitics and with the rise in gold and just the general fall in the dollar versus many currencies. So I guess if that is gonna be a long term trend, that will be a big tailwind for your market. So it is definitely something to think about.
JL: Oh, definitely. And what we’re saying is also that countries, because of the global uncertainty, they are taking greater precautions and we’re seeing a number of reform stories across the board in places like Nigeria, Egypt and Sri Lanka and Pakistan. These countries, in my view, are now better managed than what they were a couple of years ago.
JY: What are then some of, perhaps we’ve done a lot of the positives, but what are perhaps some of the risks to investing in frontier markets? We’ve touched on how the volatility may not be actually quite as large as you might might expect because of that diversification benefit. I guess thinking about the geopolitics, is there a risk in this? Well, if this is a world of great powers, which we’re going into that perhaps some of these markets might, or some of these countries might become PAs of some of the great great powers and that that has an impact on them in some way. What are the risks for investors, do you think, to investing in your fund now?
JL: So in my view the risks are pretty static and they’ve always been there. You know, war indeed is a risk. We’ve seen the first war in Europe in memory with Russia invading Ukraine. Prior to that, many years ago, Russia indeed invaded a part of Georgia. As we have to remember, however, in this global trade war and the global tensions, if we step back and think about how things were during the Cold War, many of the smaller countries were able to play the large powers against each other. And through that balance, they’ve occurred a lot of favours themselves. And we seeing that in this backdrop with, for instance, the US being quite lenient with tariffs on places like Vietnam, as Vietnam is playing both China versus the US. And I firmly believe that perhaps the risk of these countries being abandoned by certain countries have actually become small enough.
There’s the war risk. I would not describe has gone up substantially. And we’re not seeing that other risks are aspects like currency. Frontier markets have historically, I would argue, have had less effects, so currency volatility than even many emerging markets because they tend not to have big bond markets. For instance, the Brazilian Real will be very dependent on what the Fed is doing with interest rates. So if the Fed were to unexpectedly hike, then a lot of money would flow out of Brazil, most likely into the US and that would impact the Brazilian Real. Conversely, Bangladesh does not really have a bond market in which foreigners participate in, so when the Fed hikes red star, we wouldn’t see much of an impact on flows, and the currency might hold up better, at least for the time being. But currency is another risk that we’re monitoring very closely, and we benefit here substantially from zero prices, fixed income platform.
So I speak with them almost on a daily basis. We have dozens of people, typically World Bank and typically people who have worked at the World Bank and the IMF and they’re monitoring the FX dynamics on a minuscule level every single day. And we then review the FX risk. And as a result, we’ve been fortunate of not having our capital trapped in places like Nigeria when they adopted capital controls or Sri Lanka when it happened to them.
So I have a lot of thanks to extend to them for having helped us, but also we travel with them. So recently we were in the Middle East with three of our fixed income colleagues and met with a central bank. We meet with politicians, we meet with CEOs of large corporations, and we also interview, you know, people on the street to understand how the countries is moving and in which direction.
JY: And finally, what do you think investors get wrong when approaching frontier markets and how do you think frontier markets should fit into a broader portfolio? Do you see it alongside an emerging markets fund? What sort of allocations do you think investors should be thinking about for frontier markets?
JL: Sure. I would argue that if you were to invest in frontier markets, I would not go with the passive fund personally because active investing is so important in frontier markets, and you need to ensure that you don’t get your capital stock in countries which have, for instance, capital controls or are heading in the wrong direction. And active investing has a very good track record in this inefficient market. So the first point would be go for an active manager.
The second point I’ll make is low valuations that not necessarily result in the highest returns. So I would truly try to understand the stock picking framework or the manager that you pick and understand why they buy specific stocks. And the last point I would emphasise is that you should truly go for an active manager. And so I said before, pick a active manager over passive index, but then also choose an active manager who travels extensively, who’s very close to the stocks that have the experience of investing in this region, in this regions. So I’ve been doing this for 13 years, and every year I learn so many new nuances of how one can invest. So experience is another important aspect.
And to your question on allocation, we have clients that has as a part of their emerging market exposure, we have clients that see as a niche segment in their portfolios because they believe in, you know, these countries to rise, that they think that there’s an alignment globally and that this will just continue and that valuations are very attractive. But there are also those that see it as a core part of their portfolio because as you mentioned on a recent episode, that diversification is so important and it’s actually difficult to find true for diversification and frontier markets offers that. So if you want a more sort of stable long term return of your savings, then I think it makes sense to always have at least a small slice of frontier in there.
JY: Fantastic. Well, Johannes, I’ve really enjoyed that and I’ve learned a lot. So thank you very much for joining us today.
JL: Thank you. I greatly enjoyed it.
SW: This fund provides investors with excellent exposure to frontier markets, which have shown a surprisingly low correlation with emerging and developed markets. For more information on the T. Rowe Price Frontier Markets Equity fund please visit fundcalibre.com
