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As emerging markets have grown in popularity and significance over the last two decades, many of the benefits of investing in these once-idiosyncratic markets have diminished, to some extent. The correlation of emerging markets with developed markets has steadily risen, eroding diversification benefits. If anything, the fact that emerging markets represent 12.6 percent1 of the world’s total market capitalization reflects the reality that emerging markets are widely recognized as a major asset class and should be a key component of any global equity allocation, whether large or small. The question now is, Are these markets truly emerging?
For investors looking to capitalize on the expected future growth of a premature asset class—perhaps the essence of what an emerging market should be—the answer is likely no. And that raises the question of where investors should look next. A logical next step is to explore underdeveloped asset classes like frontier markets, which offer high growth potential and immense diversification benefits. This article does not seek to discourage investment in emerging markets; rather, its goal is to explore the benefits and challenges of investing in frontier markets, as well as to evaluate which characteristics make this a truly alternative equity asset class.
In the last three years, globalization has caused an insatiable hunger for alternative and uncorrelated asset classes. Investors have become more curious about what frontier markets have to offer, and a handful of institutional investors have invested in them in hopes of capitalizing on this asset class over the long term. As a result, frontier markets, benchmarks and investment vehicles have begun to evolve rapidly, making the asset class more accessible to foreign investors. Since frontier markets still remain an undeveloped asset class, caution must be exercised and investments must be further evaluated from practitioners’ points of view. This article will also explore the benefits and fundamental obstacles to investing in frontier markets in hopes of providing investors with the essential information needed to make an informed investment decision.
What Is A Frontier Market?
The Lure Of Frontier Markets
By omitting frontier markets, investors are also sacrificing a number of valuable benefits. Several telltale signs that will be explored further throughout this article suggest that frontier markets are on the verge of economic advancement. In addition, the unique makeup of frontier-market companies creates a distinctive and unusual asset class that renders immense diversification benefits. Accordingly, correlation levels among other asset classes also remain low, making frontier markets a valuable complement to an equity allocation. Despite their advantages, frontier markets surprisingly remain virtually untouched by outside investors, indicating that a first-mover’s advantage may still exist.
Uncovering Tomorrow’s Growth