Introduction

Investors around the world are seeking higher premiums for riskier investments as interest rates in the U.S. rise above 5%. One such investment opportunity is the Abrdn Frontier Markets Bond Fund, which offers substantial returns with a yield of around 10%. However, these returns come with higher levels of risk and may not be suitable for all investors.

What are Frontier Markets?

Frontier markets are typically low-income, developing countries with underdeveloped capital markets. Many of them have recently started issuing dollar-denominated bonds. These countries, considered high yield and higher risk, present attractive investment opportunities. The Abrdn Frontier Markets Bond Fund primarily invests in countries like Nigeria, Kenya, Iraq, Ecuador, Uzbekistan, and Mozambique.

The Appeal of Frontier Markets

Frontier markets have a twofold appeal. They tend to outperform mainstream emerging markets during risk-on periods and demonstrate resilience during risk-off periods. However, investing in these markets requires diligent research and understanding.

Risks and Managing FX Risks

Over half of the fund is invested in bonds rated B or higher, which are considered highly speculative with some default risk. Managing foreign exchange risk is also tricky in frontier markets due to inefficient or unavailable hedging instruments. The fund adopts a total return approach, considering some currency depreciation but compensating with high yields.

Outlook for the Second Half

Expect continued volatility in frontier markets as Treasury yields are affected by a hawkish Federal Reserve. However, catalysts such as Zambia’s restructuring progress can boost sentiment. The projected returns for the Abrdn Frontier Markets Bond Fund range from 7% to 12%.

Accessibility

The fund is accessible to investors in Europe, South Korea, Singapore, and Taiwan via stockbrokers.