Frontier markets are gaining popularity both with investors and the press. Covering countries globally from Argentina to Zimbabwe, investors may be looking to frontiers as a reaction to the success of emerging markets through the 1990s and 2000s.
MSCI defines frontier markets by considering all equity markets that are not included in the Emerging Markets index. It states it looks for countries that:
• demonstrate a relative openness to and accessibility for foreign investors;
• are generally not considered as part of the developed markets universe;
• do not belong to countries undergoing a period of extreme economic or political instability such as hyperinflation or civil war.
MSCI then applies a requirement that a country must have a minimum of two companies with securities eligible for the standard index.
Table 1 shows all countries classified as frontier markets by MSCI. It is worth noting that in November 2013, Morocco will be downgraded from an emerging market to frontier market status. At the same time, troubled eurozone country Greece will be downgraded from the Developed to Emerging Market index. Both Qatar and United Arab Emirates are being upgraded by MSCI in May next year to emerging market status after the data provider recognised both countries had made “significant progress” and improvements.
These markets may not be for the risk-averse investor. When looking at the index, investors must remain aware there can be some geopolitical risk involved. While it may not directly affect a company, underlying political issues could get in the way of management as government and politics have been driving forces behind frontier markets for many years.
However, for Emily Fletcher, co-manager of the £132m BlackRock Frontier Market investment trust, there is an inherent diversity. What affects one country may not necessarily affect another when it comes to frontier markets. “The correlation between markets is very low. If you have a bad day in Pakistan, then what drives the market there is highly unlikely to be driving the markets in Argentina,” she says.
For example, correlation between MSCI Nigeria and MSCI Pakistan is 0.08 per cent, while correlation between MSCI Vietnam and MSCI Kenya is 0.12 per cent.
Ms Fletcher says the difference between emerging markets and frontier markets is that, if German chancellor Angela Merkel or Federal Reserve chairman Ben Bernanke says something, it has little effect on frontiers. “At the moment, there is a lot less of a knock-on effect in frontiers, which helps diversify risk,” she adds.
