GLOBAL - Standard & Poor's, the ratings agency, is attempting to plug a gap in the extreme emerging markets index space with the launch of a benchmark covering "frontier market" companies based in countries such as Zimbabwe and Kazakhstan.

The S&P/IFCG Extended Frontier 150 index will made up of 150 listed stocks from 26 countries considered emerging markets according to their domicile and with sufficient liquidity in which to invest, but which are not currently included in any equity indices.

Listed markets for potential inclusion are somewhat diverse, and in some cases controversial, as it extends to cover 35 countries such as Bulgaria and Slovenia in Europe, Cambodia and Vietnam on the Far East, Colombia in South America, Jamaica in the Caribbean and Cote D'Ivoire, Kenya and Zimbabwe on the African continent.

That said, the index is perhaps not as extreme as S&P suggests as it will include companies with at least $50m in market capitalisation and minimum traded value of $25m, and which "represent an investment opportunity" in an emerging market but which could be listed, for example, in Hong Kong, or Kazakhstan which trade primarily in global depositary receipts (GDRs).

Standard & Poor's said it believes these markets now have adequate listings and turnover, and have attracted sufficient foreign investor interest to warrant the infrastructure necessary to sustain regular index calculations.

Alka Banerjee, vice president of Standard & Poor's Index Services, said the S&P/IFCG Extended Frontier 150 appears to offer new potential for sophisticated investors seeking alpha beyond maturing economies.
 
"Accelerating economic growth, increased government focus on privatizations and heightened IPO activity is luring foreign investors to frontier equity markets," said Baneerjee.

"These markets are less exposed to swings in the global economy and less correlated with other equity markets, providing investors with distinct diversification and risk reduction benefits at a time when global equity markets are increasingly volatile," she added.

There does appear to be evidence of increasing interest in these markets as Stanlib, a division of Standard Bank, last week unveiled two funds designed to tap into the emerging markets growth potential of the African markets (see previous IPE Story: Stanlib targets African growth).

S&P is not willing to reveal its 150 stocks universe at this stage, but there are some apparent trends to the type of companies included on the index as the countries with the highest weightings are Colombia, Kuwait, Nigeria, the United Arab Emirates (UAE) and Qatar - all countries seeing economic development in its telecoms and financial sectors as a result of commodities growth.

Indeed, the top 10 holdings of the Extended Frontier 150 include five financial companies, led by Emaar Properties, a financial companies from the UAE representing 5.59% of the index, as well as firms in the healthcare, energy, industrials and telecoms markets.

The index of 150 stocks will be rebalanced once a year at the end of January and index weighting may be recapping could occur each July to rebalance geographical weightings.

Limits to the index mean the maximum weighting of stocks from one country is 15% while a single company is not allowed to represent any more than 10% of the index.

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