Frontier Markets May Reduce Risk, But Beware Illiquidity

Each frontier-markets country tends to have more idiosyncratic risks, meaning individual equity markets are less correlated and may help to diversify your portfolio

Patricia Oey 18 December, 2014 | 4:04PM

Frontier markets represent a tiny segment of the global investment universe, but interest in the asset class has been growing, as investors search further afield for better growth opportunities and pursue new ways to diversify their portfolios.  

Frontier markets, by definition, are at the far edge of the investment universe and are generally not included in global equity indexes or even in many emerging-markets equity funds. This is because frontier capital markets are not easily accessible. These markets tend to have a small number of liquid securities and restrictions on foreign ownership. Investors mulling the merits of this investment frontier should take a closer look before jumping in: The underlying risks and performance drivers are quite different from those in emerging and developed equity markets.

The investment case for frontier markets sounds enticing. Countries such as Kuwait, Nigeria, and Pakistan are at an earlier stage of development relative to emerging-markets economies. Many frontier-markets economies are entering a period of mid- to high-single-digit growth, thanks to a very low economic base, favourable demographics, growth in infrastructure spending, and, in some cases, abundant natural resources. And relative to emerging markets, certain frontier countries will benefit from the rapid adoption and dissemination of “new economy” services such as mobile banking and mobile payments, which should contribute to growth in the medium term.

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About Author

Patricia Oey  Patricia Oey is an ETF analyst at Morningstar.

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