(Bloomberg) — Frontier markets will likely extend their impressive rally into next year, thanks to investor optimism about economic recovery and reduced risks of sovereign defaults.

Asia Frontier Capital Ltd., a Hong Kong-based fund manager focused on the region’s high-growth economies, is buying stocks in Sri Lanka and Bangladesh. Aberdeen Group Plc sees potential for bond gains in Argentina, Ghana and Ecuador next year, while Federated Hermes Inc. has increased exposure to frontier bonds and favors debt from Nigeria, Sri Lanka, Pakistan and Ecuador.

After shoring up their finances, some of these once debt-ridden economies have emerged as investor darlings this year given their perceived insulation from trade tensions and geopolitical risks. It’s a sentiment reversal from a few years ago, when some of them were mired in sovereign insolvency or debt restructuring, and it contrasts with ongoing concerns about fiscal woes in major developed nations.

“The frontier story is only beginning now,” said Ruchir Desai, fund manager at Asia Frontier Capital. “These countries have had to restructure the whole economy, the whole thought process of running the country.”

The MSCI Frontier Markets stock index has gained over 40% this year in dollar terms, set for its best performance since 2005. The FTSE Frontier Emerging Markets Government Bond Index has risen 12%, on track for a record year. Egypt, Pakistan and Bolivia are among countries that have delivered the highest returns on debt, Bloomberg indexes show.

“Frontier bonds have high income return component and capital appreciation opportunities, making them an attractive total return play in 2026,” said Mohammed Elmi, senior portfolio manager for emerging-arkets fixed income at Federated Hermes. “Frontier issuers are much more idiosyncratic in nature and less correlated to overall risk markets.”

Similarly, Daniel Wood, a portfolio manager at William Blair Investment Management, described frontier markets as one of the firm’s “highest convictions.” “We like a diversified basket of frontier countries that are uncorrelated with one another and should continue to see strong returns,” said Wood, who favors markets such as Uzbekistan, Kazakhstan and Ghana.

To be sure, some observers caution that investors need to lower their expectations for bond gains next year, following the significant drop in yield premiums in sovereign notes such as Ivory Coast’s. Frontier markets also carry their usual risks of thin liquidity and political uncertainties.

But some remain optimistic.

Aberdeen, which had $930 million of assets for its frontier-market bond fund as of November, will raise its holdings of local-currency bonds in these economies next year, said Kevin Daly, the firm’s portfolio manager who helps oversee the fund.

The fund, which according to Bloomberg data has beaten 98% of peers on a five-year basis, could look to expand exposure to local-currency bonds in Uganda and Kazakhstan, Daly said.

“Your worst case scenario for frontier is an elevated risk off period, but those typically don’t last too long,” said Daly, adding that there is renewed investor interest when asset prices adjust lower. “It has been a year of dealing with external challenges,but at the same time now we’re reaping the benefits of a more attractive backdrop.”

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