Though a growing number of funds are providing access to frontier markets, it’s important to remember that frontier countries generally have less established equity markets, and more regulatory and political unknowns than markets elsewhere in the world. In other words — investing in them can be risky.
Market Realist – The graph above shows inflation rates as measured by the annual growth rate of the GDP implicit deflator in some frontier markets (FM). As you can see, other than the Middle East and North African (MENA nations), most markets have inflation above 5%—some even above 10%. Argentina is seeing hyperinflation, with an inflation rate of 18.5% in 2013. In fact, Argentina has seen inflation rates of above 17% since 2010.
Emerging markets (EEM)(VWO) have also seen high inflation rates in the recent past, but not to the extent that frontier markets are currently experiencing. The developed world (EFA)(VEA) has the lowest inflation rates. To put this difference in perspective, inflation in the U.S. (SPY)(IVV) was 1.5% in 2013.
Along with inflation, frontier markets have other issues—like a lack of liquidity in financial markets, rocky corporate governance, and geopolitical concerns.
Please read the next and final part of this series for more must-knows on frontier markets.