What is Frontier Market?
A frontier market refers to a type of emerging market that is considered to be in the early stages of development and has not yet reached the level of maturity of more established markets. These markets are typically characterized by a smaller size, lower liquidity, and a higher degree of risk compared to more developed markets.
Frontier markets are often found in countries with low-to-middle-income economies and are typically smaller, less accessible, and less well-known to international investors than other emerging markets.
Frontier markets offer potentially higher returns for investors but also carry a higher level of risk due to their relative lack of regulation, transparency, and political stability.
Frontier Market vs Emerging Market
Emerging markets and frontier markets share some similarities, but they also have several key differences. Here are a few ways in which frontier markets differ from emerging markets:
Development stage: Emerging markets are generally considered to be more developed than frontier markets, with stronger economies, larger populations, and more mature financial markets. Frontier markets, on the other hand, are typically in the very early stages of development, with smaller economies and less mature financial systems.
Liquidity: Emerging markets tend to have more liquidity than frontier markets, meaning that it is easier for investors to buy and sell assets in those markets. Frontier markets are often characterized by lower liquidity, which can make it more difficult for investors to exit positions or make large trades.
Risk: While both emerging markets and frontier markets are considered to be more risky than developed markets, frontier markets are generally considered to be even riskier than emerging markets due to their lower level of development, weaker institutions, and greater political instability.
Accessibility: Emerging markets are generally more accessible to international investors than frontier markets, with more established financial systems, better regulatory frameworks, and greater familiarity among investors. Frontier markets, on the other hand, are often more difficult to access, with fewer investment options and less information available to investors.
Why do the Investors Interest in Frontier Markets?
Potential for high returns: Frontier markets are often characterized by high levels of volatility, which can create opportunities for investors to generate significant returns. Because these markets are less developed, there may be more room for growth and innovation, which can lead to strong returns for investors.
Portfolio diversification: Frontier markets can provide investors with an opportunity to diversify their portfolios by investing in assets that are not correlated with more established markets. This can help to reduce overall portfolio risk and potentially increase returns.
Demographic trends: Many frontier markets are located in regions with rapidly growing populations, which can create opportunities for businesses and investors alike. These markets may offer access to new consumers, as well as opportunities to invest in sectors such as infrastructure, healthcare, and education.
Access to natural resources: Some frontier markets are rich in natural resources, such as oil, gas, and minerals. Investors may be attracted to these markets due to the potential for high returns in these sectors.
Geopolitical considerations: Some investors may be interested in frontier markets as a way to gain exposure to specific regions or countries that are of strategic importance. For example, investors may be interested in investing in frontier markets located along the Belt and Road Initiative, which is China’s massive infrastructure development project in Asia, Africa, and Europe.
Frontier Market Countries
There is no definitive list of frontier markets, as different organizations and indices may use different criteria to define these markets, so this list may not be comprehensive. Additionally, the classification of a country as a frontier market may change over time as the country’s economy and financial markets evolve.
These are countries that are considered to be frontier markets by the MSCI: Bahrain, Bangladesh, Pakistan, Romania, Sri Lanka, Vietnam, Jordan, Kenya, Oman, Mauritius, Mali, Morocco, Nigeria, Tunisia, WAEMU, Croatia, Estonia, Iceland, Lithuania, Kazakhstan, Serbia, and Slovenia
