Overview: The must-know characteristics of frontier markets

Looking for the next frontier in emerging market investing? Del Stafford dives into these underdeveloped countries to assess the investment case.

With a growing number of ETFs providing access to frontier markets, it’s important to take a step back, understand the category and assess whether these equities are right for your portfolio.

Frontier markets, sometimes referred to as “pre-emerging markets”, are countries with equity markets that are less established – places like Argentina, Kuwait and Bangladesh.   They tend to be characterized by lower market capitalization, less liquidity and, in some cases, earlier stages of economic development.  As you can imagine, they can be particularly hard to access for foreign investors.

Market Realist – As the graph above shows, the GDP figures of frontier markets (FM) aren’t only much lower than those of developed countries such as the U.S. (SPY) and Japan (EWJ) but are also trailing those of emerging markets (EEM) such as India (EPI) and Brazil (EWZ). But this contrast may not hold true for all frontier markets—especially those in the Middle East.

As many economies in frontier markets are in earlier stages of their development, there’s a lot of scope for GDP improvement in the long term. But investing in these markets isn’t devoid of risk. In the medium term, frontier markets are expected to be plagued with inflation, partially driven by their own growth as well as dollar appreciation. So caution is advisable.