The summer doldrums have set in early this year for many of the global markets. The drop-off has been acute, as the usual slowdown in global trading during summer vacation season has been sharply exacerbated with focus on the World Cup. Finally, as if that were not enough to slow trading, central banks around the world have been keeping yield curves so tied to the ground that investors have had all sorts of trouble finding significant yield for many asset classes.

This has resulted in a lot of activity that many of us would not have previously expected. This week, Norway’s sovereign wealth fund took a surprising step and announced that it was going to look for more yield by authorizing investments into “frontier” markets.

Most casual market observers are probably not aware that Norway even had a sovereign wealth fund, and even fewer know that Norway’ sovereign wealth fund is the largest of its kind in the world -$890 billion. It’s a massive fund that owns 1.3% of the world’s stocks. These funds are generally the financial result of sales of either oil or exports. In Norway’s case, the funds come from the proceeds of its vast share of North Sea oil deposits. The fund announced that it will broaden its “exposure to different sources of return and seek to exploit time-varying investment opportunities.”

Frontier markets are one-step beyond emerging markets on the risk/reward continuum, and include countries like Ukraine, Kazakhstan and Vietnam. All the potential horrors that investors fear – poor liquidity, capital controls, political instability – are present in frontier markets. So are potential rewards. Norway’s fund is not looking to get crazy in this space, but it is instructive as to the extent that even a government will go to find yield. This move could even legitimize such investments to other funds, which would encourage riskier investments into these markets.

My View: What this underscores is the continued interconnectedness of the global economy. In the last year, we have seen the fortunes of emerging markets come and go with the winds of monetary policies. That looks like it is being extended to frontier markets. As developed economy yields remain suppressed, capital goes in search of higher returns, but when investors sense that will change, money changes direction quickly.

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