To a contrarian investor, articles like this one–documenting the fact that frontier market equity funds so far this year have received more than $1 billion in inflows, easily eclipsing their hitherto record in 2007 of $442 million–signal that–in Chuck Prince lingo–the music may have indeed stopped.  This would run contrary to the conventional feeling following the confirmation of QE2 that the yield-seeking ‘risk trade’ was still ‘on’, though the natural rebuttal to that would be that markets have essentially been pricing in QE2 to their risky asset valuations ever since Ben Bernanke all but revealed his hand in Jackson Hole on August 27th.  That said, as the true ‘tail end’ of the risk curve, frontier markets have historically lagged their emerging brethren in terms of timing and breadth (their higher volatility also suggest that even core ‘believers’ are somewhat fickle).  The MSCI BRIC index, for instance, has risen nearly 150 percent since March 2009, while the MSCI frontiers index has ‘only’ returned 65 percent over that same period (see chart, left).  This suggests that the claustrophobia felt by some emerging market investors could naturally be a boon for less crowded, frontier trades, per Nouriel Roubini’s latest musing.

Additionally, for at least one fund manager, QE2 is a curse given its inflationary implications.  “I would view the impact of QE2 as being mostly negative,” argued Ahmed Heikal, chairman of Cairo-based private equity firm Citadel Capital.  “QE1 has caused a substantial rise in food prices, QE2 is a continuation of that. There is no sign of food prices abating anytime soon, and that is going to put inflationary pressures on many parts of Africa.”  This echoes our argument that inflation in countries like Nigeria, where food is such a relatively large portion of headline CPI compared with developing nations–will be especially rampant all else equal going forward.  This effect would be muted to a large degree if frontier currencies also rose.  To Razia Khan, head of Africa research at Standard Chartered, the rub is in the timing of it all.  “The danger for African countries is if you see oil prices going a lot higher–or food prices–before you see African currencies rising,” Khan said.

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