Definition
A Frontier Market is a term used in investment to describe a developing country not big enough to be considered as an emerging market. These countries often have small, less liquid, and less developed capital markets. The term indicates a nation’s economy that’s in an earlier stage of market development closer to the “frontier” of finance and has the potential for high growth and high return, but at the same time, high risk due to political instability and low liquidity.
Key Takeaways
- Frontier markets are developing economies that are considered more established and stable than the typical emerging markets. They comprise countries with smaller, less accessible, but growing capital markets.
- Investing in frontier markets entails higher risks due to volatility, currency fluctuations, political instability, and lack of transparency. However, they can provide high potential returns and diversification benefits, as they often have low correlation with developed and emerging markets.
- Common frontier markets include nations like Vietnam, Nigeria, and Argentina. These markets are characterized by rapid economic growth and development, but investors should approach them with caution, as they may face regulatory uncertainties and illiquidity.
Importance
Frontier markets are important in finance as they represent the emerging economies that are less established than those in traditional emerging markets. These markets offer investors high growth potential and the opportunity for significant economic development.
They can provide diversification benefits due to their lower correlation with developed markets. However, they also present unique risks such as political instability, regulatory changes, and lower liquidity.
Despite these challenges, frontier markets can be an attractive component of a well-balanced, long-term investment portfolio. By investing in frontier markets, investors can tap into these high-growth economies before they become mainstream, offering potential for higher returns.
Explanation
Frontier Markets refer to developing markets that are too small, restricted, or underdeveloped to be classified as emerging markets. These markets are in their early stages of economic development and offer significant growth potential for investors willing to undertake increased risks.
From the perspective of the investor, Frontier Markets provide an opportunity for diversification due to their low correlation with other investment options. Here, variation exists concerning levels of liquidity, market accessibility, operational efficiency, and the legal framework, yet these markets hold the promise of high returns.
While these markets pose risk due to political instability, lack of regulatory standards, lower transparency, and potential currency fluctuations, they are used in the global investment landscape to gain exposure to fast-growing economies with untapped potential. For institutional investors and business establishments, frontier markets serve as a chance for early entry into regions or sectors that might eventually emerge into substantial economies in the future.
Therefore, with careful research and risk assessment, frontier markets play an integral role in global finance and investment portfolios.
Examples of Frontier Market
Vietnam: In 2009, MSCI, a global provider of equity, fixed income, hedge fund stock market indexes, and multi-asset portfolio analysis tools, reclassified Vietnam as a Frontier Market due to its rapid economic growth and increased equity market globalization. Despite being a relatively new player to the global economy, Vietnam has seen significant economic advancements, including a rise in foreign investment and expanding domestic consumption.
Argentina: Argentina was classified as a Frontier Market by MSCI from 2009 to
During this period, the country was grappling with high inflation rates and economic volatility, but it continually showed promise with its natural resources sector and large, literate population. However, despite its potential, Argentina faced many challenges, such as a lack of transparency and limited market accessibility for foreign investors.
Nigeria: Nigeria is another example of a Frontier Market. It is Africa’s largest economy and is rich in natural resources, especially oil. Nigeria has a developing stock exchange and attracts investors who are seeking high, long-term returns. However, it presents high risks due to political instability, economic policy uncertainty, and infrastructure shortcomings.
FAQs about Frontier Market
What is a Frontier Market?
A Frontier Market is a type of developing country which is more developed than the least developing countries but too small, restricted, or underdeveloped to be generally considered an emerging market. These markets usually have smaller economies or less developed capital markets than traditional emerging markets.
What are some examples of Frontier Markets?
Examples of frontier markets include countries such as Kenya, Vietnam, Bangladesh, Nigeria, Argentina, and many more.
What are the advantages of investing in Frontier Markets?
Investing in Frontier Markets can often provide greater growth opportunities due to their emerging nature. They can also offer diversification for investors looking to diversify their portfolio with assets that are not correlated with larger markets.
What are the risks of investing in Frontier Markets?
While Frontier Markets can provide great growth opportunities, they also come with their share of risks. These include political instability, regulatory risks, low liquidity and transparency and currency risks. It’s important to remember to do thorough research and due diligence before investing in these markets.
How does one invest in Frontier Markets?
Investing in Frontier Markets is often done through mutual funds or ETFs that focus on Frontier Markets. It’s also possible to invest directly in certain cases through American Depository Receipts (ADRs) or Global Depository Receipts (GDRs) , but this requires more research and effort.
Related Entrepreneurship Terms
- Emerging Market
- Market Liquidity
- Capital Market
- Market Volatility
- Investment Diversification
Sources for More Information
- Investopedia: A site dedicated to providing comprehensive definitions and explanations of all financial terms and concepts.
- Morningstar: A well-respected investment research company that provides insights on a wide range of financial topics including frontier markets.
- Financial Times: Offers focused articles, analysis and news on global financial markets including frontier markets.
- Bloomberg: A global leader in financial news and data, providing a dedicated section on emerging and frontier markets.
