What are Frontier Markets?

Frontier markets are often seen as 'emerging' emerging markets and they represent potential economic powerhouses of the future. Frontier markets investing is a logical next step for investors who have an allocation to emerging markets and are looking to expand it. As frontier markets continue to develop, they could present investors with an exciting opportunity with potentially low correlation to developed market equities and to broader global emerging markets. As is the case for all investments, frontier market equities are not without risk, and we outline some of their specific challenges below. Many of these risks are functions of the immature nature of the asset class, and also represent  opportunities for long-term investors. These risks may also be mitigated by creating a well diversified portfolio.

Political risks
Although many of these countries are much more stable than was the case a decade ago, there is definitely still an element of political risk. Aside from geopolitical events, which can disrupt  investment or cause markets to close, there is also the possibility that restrictions or financial penalties can be imposed on foreign investors without warning. Liquidity constraints Frontier stock markets are still in the process of  developing, and so are sometimes thinly traded, which can present liquidity risks which need to be carefully managed. As the markets mature, liquidity should improve.

Currency risks
Many frontier market currencies are undervalued on a purchasing power parity basis and so are expected to appreciate over the long term, which could provide a potential additional source of return. In order to benefit from this potential appreciation over the long-term, investors may have to ride out potential volatility in the short to medium term. As a result of this, frontier markets have historically been less volatile than mainstream emerging markets.

Investing In Frontier Markets