Frontier markets were mixed in 2016, with most of the Middle East and Africa lagging the rest of the universe and a few mar­kets surging ahead 30-40% on the year. We discuss the leading markets individually (below), but we also would like to note the significant structural changes afoot in the MSCI Frontier Mar­kets (FM) index. In 2016, several of the largest markets left in the frontier were flagged for promotion to emerging markets sta­tus. These include Pakistan (already emerging markets [EM] in FTSE/Russell and will re-upgrade to EM for MSCI in May 2017), Argentina (watchlisted for EM upgrade by MSCI), and Romania (watchlisted for EM upgrade by FTSE/Russell).

Meanwhile Nige­ria may be on its way out of the major indices (watchlisted for expulsion by FTSE/Russell) if it cannot sort out its own exchange rate and convertibility issues soon. Although Vietnam has been busy adding significant breadth and depth to its own market, we still see a dramatic concentration of the opportunity set cur­rently defined as "frontier" on the horizon over the next two years. Overall, the liberalized access to these markets that such upgrades represent is positive for investors, if somewhat dizzy­ing for index watchers. For our investment outlook, we see little directional change from last year's views, and remain bullish on Argentina, Vietnam, frontier Europe, and temporarily Pakistan (new call) and bearish on most of the Middle East and Africa. Overall, frontier markets remain very attractively priced relative to all other major market segments with much lower valuations and ROEs comparable to the S&P 500
(see CHART 1 and CHART 2).

See Table 1