Geopolitical risks recede, Morgan Stanley highly recommends frontier market bonds
JP Morgan strategists stated that the easing of geopolitical risks, a weakening dollar, and rising gold prices are expected to bring substantial returns to frontier market bonds in the coming quarter. Frontier markets lie between the least developed countries and emerging markets, with countries like Ghana, Egypt, and Nigeria expected to benefit from interest rate cuts. Nigerian naira bonds are seen as a preferred choice, as oil prices are expected to remain above $60, contributing to its current account surplus. Ghana and Uzbekistan will also benefit from the rise in gold prices
According to the Zhitong Finance APP, JP Morgan strategists have stated that due to the easing of geopolitical risks, a weakening dollar, and rising gold prices, frontier market bonds are expected to yield substantial returns in the upcoming quarter.
It is understood that the so-called frontier markets lie between the least developed countries and emerging markets. These economies have a certain development foundation, but their market size, liquidity, or stability has not yet reached the standards of emerging markets.
JP Morgan strategists, including Ayomide O Mejabi, stated: "During the heightened geopolitical risks in June, there was no large-scale sell-off in the frontier local currency bond market. Given the still extremely high arbitrage space, we expect these markets to perform even better in the relatively calm summer ahead."
Frontier markets outperform emerging markets
Although there is still uncertainty regarding U.S. trade policies, strategists pointed out that interest rate cuts in developed countries and a weakening dollar should provide room for interest rate cuts in frontier economies. This could further support the performance of local currency bonds.
Strategists stated: "Countries like Ghana, Egypt, and Nigeria should benefit, with these countries potentially cutting rates by 600 basis points, 400 basis points, and 200 basis points respectively for the remainder of this year."
Nigerian naira bonds are one of JP Morgan's preferred targets. JP Morgan has re-established long positions in Nigeria's Open Market Operations (OMO) bills, as the bank expects oil prices to remain above $60 per barrel. This will help Nigeria maintain a current account surplus and accelerate reserve accumulation in the second half of the year. Strategists added that Nigerian bonds are also expected to benefit from interest rate cuts.
JP Morgan strategists noted that while oil prices above $60 are favorable for oil-exporting frontier countries, they are not high enough to harm oil-importing countries like Pakistan. Meanwhile, JP Morgan pointed out that some frontier countries, such as Ghana and Uzbekistan, are benefiting from rising gold prices this year and forecast that this trend will continue
