These stocks are micro caps, right?

stylized image of globe overlaid on horizontal stock ticker image

I am often asked about the trading liquidity of the investment universe for the Fidelity Frontier Emerging Markets Fund. Overall, the liquidity in these equity markets, although lower than in more developed markets, has improved consistently over the past 20 years. I will be expanding on the liquidity trends in frontier emerging markets today.

There are three key takeaways regarding liquidity and frontier emerging markets:

  1. The investment universe for the Fund is approximately US$1.8 trillion in size, and the total value traded per day is nearly US$2 billion (Source: Fidelity Management & Research Co.).

  2. The size of this market and its trading levels have grown at a 13%–15% rate for the past 15–20 years (Source: Fidelity Management & Research Co.).

  3. Frontier equity markets are smaller than developed and emerging markets, but are about the size emerging markets were 25 years ago.


So let’s delve deeper into this analysis and provide some background. To start, we divide all equities into three categories: developed markets (DM), emerging markets (EM) and frontier EM (FEM), including all the listed equities, not just the names in the respective indices. Then we calculate numbers such as aggregate market cap (total U.S. dollar value and free float-adjusted), average daily trading value (ADTV) in U.S. dollar terms and market turnover ratio. All this data should help us test our core thesis: FEM liquidity will likely follows the path set by emerging markets over the past 25 years – that is, structurally positive economic growth will lead to strong equity performance, which attracts investor inflows, and to equity issuance, which improves liquidity.

The first area of analysis is to calculate the total market size of frontier emerging markets. These markets include all frontier and small EM countries. When we add up the values of all listed stocks, the total value of FEM equities is approximately US$1.7 trillion  If we look at these markets historically, the total value has grown at a 13% compound annual growth rate (CAGR) over the past 15 years. Chart 1 highlights the growth of this market since 1992 (Source: Fidelity Management & Research Co.).

Chart 1: Frontier All-stock Universe Market Cap (US$ trillion)
Chart 1: Frontier All-stock Universe Market Cap (US$ trillion)
Source: Fidelity Management & Research Co.

The size of the market, however, is only one data point. Many investors are more interested in how much value trades on the respective stock exchanges each day. This number indicates the liquidity of a market or individual stock to investors. They usually have a minimum level in mind that provides some reassurance that they can sell their shares, if necessary, within a reasonable time frame. How do frontier emerging markets compare? FEM countries trade almost US$2 billion of value per day (the ADTV) and, like total market cap, the ADTV has grown globally at a rate of 15% for the past 15 years. So frontier emerging markets do have lower levels of liquidity than their emerging and developed counterparts, but the historical growth rate has been quite positive. Consider emerging markets as a historical comparable: their ADTV was $4.9 billion per day 20 years ago, and they grew at a 16% CAGR (Source: Fidelity Management & Research Co.).

As well, as seen in chart 2, the ADTV in FEM countries has reached higher levels than the $2 billion per day we see currently. This is not surprising: much like emerging markets, FEM equities fell out of favour with investors starting in 2010, as many commodities came under pressure.

Chart 2: Monthly average daily traded value (in US$ millions) on FEM stock exchanges
Chart 2: Monthly average daily traded value (in US$ millions) on FEM stock exchanges
Source: Fidelity Management & Research Co.

Finally, another factor to consider regarding the lower levels of liquidity in FEM countries, compared with emerging and developed markets, is the smaller “free float,” driven partly by higher levels of government and family ownership. Given that usually governments will not trade their holdings, the amount of available shares to trade, or the “free float,” is lower in frontier markets (see Chart 3). But what we have seen in emerging markets is that as a country develops, governments reduce their ownership of the economy as part of the process.


Chart 3: Percentage of the stock market that is free float and percentage of market cap that is owned by government entities (SOE)
Market free float (%)
SOE (% of total market cap)
Source: Fidelity Management & Research Co.

The bottom line is that frontier emerging markets are indeed smaller than developed and emerging markets,  but they have grown consistently at a rate of 13%–15% for the past 15 years, to over $1.7 trillion in size, and they trade almost $2 billion per day. This level of growth and size of market recalls emerging markets about 20 to 25 years ago. When those markets generated attractive performance, liquidity continued to improve – which may very well be expected for FEM countries too.


Thanks for reading,

Adam Kutas

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