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Money is flowing out of risky emerging market stocks, and guess where it's going? Into even riskier frontier market debt and stocks.

The Economist reports:

Investors in America and Europe were hungry to buy dollar-denominated debt offering juicy yields. Zambia drew $12 billion of orders for a ten-year bond paying only 5.4%. Pension-fund trustees and consultants now ask how much money they should allocate to the frontier.

Frontier markets are tiny undeveloped countries whose stock market is typically small, risky, and illiquid. Sometimes referred to as "pre-emerging market countries," Argentina (NYSEARCA:ARGT), Egypt (NYSEARCA:EGPT), Nigeria (NYSEARCA:NGE), and Kuwait are among the countries in this category.

(click to enlarge)

What made emerging market stocks a source of excitement in the 1990s has now found a new place in volatile and unestablished frontier markets, according to Charlie Robertson at Renaissance Capital.

High risk taking along with excessive leverage is associated with market tops.

A contraction in risky investment behavior, not an increase, is the sure sign of a correction and possible bottom. And by that measure, frontier markets in their present state have a long way to go.

Link to the original post on ETFguide.com

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Source: Frontier Markets: Investors Double Up On Risk