Ocean in Vietnam There are about 200 countries in the world (give or take a few depending on whether you ask the UN or FIFA), and of these, 23 are classified as developed markets, 27 as emerging markets, and about 25 are so-called frontiers; smaller, but still investable markets such as Tunisia, Jordan and Sri Lanka.
The biggest difference between frontier and emerging markets is that frontiers are essentially not developed enough yet to be classed as emerging. Indeed, they are sometimes referred to as “pre-emerging markets”. Frontiers usually also have fewer listed companies with less liquidity, and some markets have limits on foreign ownership.
As a less popular area for investment, there are several myths about these markets, including high-risk and poor governance. But in reality, these economies are often driven by the same factors as emerging markets: young populations and growing wealth. Frontier Market Challenges
According to Rory Kutisker-Jacobson, portfolio manager at the Allan Gray Frontier Markets Equity Fund, the biggest challenge with frontier markets is getting investors to understand and accept somewhat higher risk than they may be used to. In developed markets, the overwhelming focus is on growth and missed opportunities. In frontier markets it is the opposite: conversations about investment risks are dominated by politics, the economy and currency.
“For many people, frontier markets are simply uninvestable. But this challenge is also what creates the great opportunity we are seeing today. The valuations on offer in many frontier markets are extremely attractive as a result of the low sentiment and interest, particularly in comparison to global peers. A lot can go wrong in many frontier countries and the companies therein may still generate superior investment returns, given starting prices,” Kutisker-Jacobson says.
This does not mean that investors should disregard risk, but rather find a level they are comfortable with. One way to get frontier exposure is by investing in a combined frontier and emerging markets fund. Ross Teverson, manager of the Jupiter Emerging and Frontier Income Trust , says such funds aim to avoid the less attractive sides of frontiers, like few opportunities and less liquidity, while benefiting from the return potential and diversification benefits.
Dominic Bokor-Ingram, senior portfolio manager at the Magna New Frontiers sub-fund, says opportunities are often found when changes in political or economic directions create windows of opportunity: “These can range from ECB policy changes creating restructuring opportunities in the Greek banking sector, language barriers […]