Today’s frontier markets include countries such as Bahrain, Kenya, Kazakhstan, Niger, Serbia and Tunisia to name just a few. Widely considered some of the riskiest of markets to invest in, Frontier Markets present small, underdeveloped stock exchanges and currency markets as well as private equity opportunities, to only the most intrepid of investors.
What are frontier markets?
Quite simply, Frontier Markets are capital markets that are the least advanced in the developed world. Typically they are reasonably small markets within a country that is less established than emerging markets but more established than the least developed countries (LDCs).
Traditionally, they can be known as pre-emerging markets, but are typically small, carry inherent risk and may be too illiquid to be considered an emerging market.
Many investors consider frontier markets as some of the riskiest places to invest, because of their size, political instabilities, and underlying issues.
How are frontier markets defined?
The world’s largest index compiler, MSCI Inc, determines a frontier market by applying their MSCI Global Investable Market Indexes (GIMI) Methodology. This comprehensive approach ensures a global view by focusing on index liquidity, investability and replicability of all markets. As an example, to be considered a frontier market as part of this index, the market must meet some subjective criteria such as its openness to foreign investment and ease of capital flows.
Frontier Market vs. Emerging Market
The difference between a frontier market and an emerging market lies in the status and traits of each.
- Do not have the economic strength of countries such as the UK, Japan and US
- In the process of becoming a developed country
- Tend to offer greater stability than Frontier Markets
- More closely aligned with the global economy
- Often include newly industrialised countries
- Countries that often display strong demographics
- Generally open to foreign investment
- Emerging market stocks estimated to be worth $20 trillion
- Less advanced economies within the developed world
- Less correlated with the global economy
- Do not tend to have developed stock markets
- Smaller and less accessible than emerging markets
- Often display political instability, poor liquidity and additional risks
- Frontier markets combined market value estimated to be worth $510 billion
Who invests in Frontier Markets & why?
The main investors in Frontier Markets are traditionally local and state investors. Whilst emerging markets are more open and accessible to foreign investment, frontier markets can be more difficult for foreign investors. Therefore, the majority of foreign investment is through active investment funds or passive investment vehicles.
The main attraction of investing in Frontier Markets is the thought of getting into the market before it is crowded. In turn, prospering from the growth of the economy and the development of the financial infrastructure, as other foreign investment is made. The majority of investors in Frontier Markets are seeking uncorrelated high returns, from direct investments in startups and infrastructure.
Today, amid the global crisis of COVID-19, investing in frontier markets and economies such as Uzbekistan, may seem brave. Nonetheless, consulting an investment management team may help you decide and devise an effective strategy. For more information and opportunities to invest in Frontier Markets visit https://www.sturgeoncapital.com/.