By Libby George
LONDON (Reuters) - The new era of unpredictability, marked by tariff threats and rising global tensions, is prompting emerging market investors to look for shelter in frontier markets that are relatively safe from U.S. President Donald Trump's trade policy shifts.
Trump's return to the White House put Mexico's peso on a roller coaster, further drained enthusiasm for foreign investing in China and cooled hopes of a golden era for emerging markets.
So-called frontier markets are the riskiest in EM and often smaller developing economies in Africa, Eastern Europe, Asia and even Latin America. They aren't exactly a safe be but investors say they are strong investment destinations this year because they are not in Trump's firing line for tariffs and other policy shifts.
Economies like Serbia have the added allure of sturdy growth, while for Ghana, Zambia and Sri Lanka, emergence from debt default allows them to focus on reforms and growth.
"The frontier markets are likely to be more insulated than the others, because I don't think that countries like Nigeria or Sri Lanka or Paraguay ... will be a target anytime soon for this administration," said Thierry Larose, an emerging market portfolio manager with Vontobel.
"They have their own idiosyncratic risk, but they're pretty much immune to the risk-on risk-off affecting the mainstream emerging markets," he said, calling them an "extremely powerful engine of diversification".
For Anton Hauser, senior fund manager with Erste Asset Management, assets such as Serbian local bonds are good bets to capture strengthening economic growth in Eastern Europe.
HIGH YIELD AND HIGH PERFORMANCE?
A riskier global climate often sends investors rushing for safe-haven assets such as U.S. Treasuries, gold or German government bonds.
The COVID-19 crisis and the fallout from Russia's invasion of Ukraine saw investors ditch frontier markets in their flight to safety; several of them tumbled into sovereign default.
But the backdrop might be different with the famously mercurial Trump's second presidency.
Some of the riskiest debt bets - such as Argentine, Lebanese, Ukrainian and Ecuadorean international bonds - outperformed spectacularly last year.
Many expect similarly idiosyncratic stories - driven chiefly by local dynamics - to drive returns again over 2025.
"High yield has also done generally pretty well - it's been doing well for a few months now," said Nick Eisinger, co-head of emerging markets with Vanguard, adding: "We still think those are interesting parts of the market."