Payden & Rygel: Frontier Investing - The Road Less Travelled

Feb 23, 2024

The EMD team at Payden & Rygel has conducted an extensive analysis of the current investment opportunities in the 38 Frontier Economies around the world. These are their most important conclusions:

• Emerging Market Debt (EMD) has continued to develop as an asset class, bringing with it a new subset of countries—EM frontiers. We use three criteria to classify frontier economies—investment credit rating status (high yield), income status, and issuance size. The EMD frontier universe currently consists of 38 economies.
• EM has confronted a number of shocks since 2020. This includes the pandemic, the increase in food/energy prices, along with a move higher in global interest rates. For frontiers, which are smaller economies, this has resulted in higher yields and more limited access to dollardenominated funding.
• Recent global challenges raise the question: What is the case for investing in frontier economies? Three are salient. First, among the 38 countries in the space, there is diversification potential. Second, there is plenty of differentiation among the sovereigns. Last and most importantly, since inception frontiers have significantly outperformed the broader dollar-pay EM bond indices.
• We look at macro trends in frontier economies. In broad strokes, growth is higher for the group, which would be expected as they are starting from a smaller base. Turning to monetary policy, the news on inflation is less encouraging; it is higher and food has a larger weight in the CPI baskets.
• For investors, the willingness and ability of a sovereign to pay is the foremost concern. We look at the fiscal and external balance sheets across frontier economies and examine factors that determine payment capacity. We also introduce some simple metrics for thinking about sovereigns’ ability to pay.
• Economic metrics and debt ratios are not the entire picture when we analyze sovereign debt. Governance and the strength of institutions matter, particularly in the frontier space.
• Payden has been active in frontier markets since their development. Our investment in frontiers is, however, selective. We have generally been overweight the universe on aggregate but have avoided exposure in countries where we feel uncomfortable with the credit trajectory. 

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