Don't Forget Frontier Markets

Aug. 01, 2017 7:42 AM ETBBAR, BLX, CPA, FRN, QIWI, FM5 Comments
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Bottom Fisher Ideas
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Summary

  • Frontier markets are countries that are too small or illiquid to qualify as emerging markets, but still have investment potential.
  • Options for investing in frontier markets are limited, frequently characterized by lack of liquidity and high expenses.
  • Despite these issues, there are good reasons to invest in frontier markets.

Investment Thesis

It is not easy to invest in frontier markets and many investors have no exposure to them. While it will not have a large impact on an investor's portfolio to ignore the frontier markets, the cheap valuations, favorable demographics, and low correlation with other markets make them a worthwhile investment.

Frontier Markets

Frontier markets are countries with investable stock markets, but are too small, illiquid, or unregulated to qualify as emerging markets. Definitions of what exactly constitutes a frontier market vary between the three major index providers, but there is significant overlap between them.

  • S&P/Dow Jones has the broadest definition, which includes 35 countries.
  • MSCI classifies 33 countries as frontier markets, although only 24 of those appears in its frontier markets index.
  • FTSE/Russell has 26 countries in their frontier markets index.

Each index contains securities in South America, Africa, Europe, Asia, and the Middle East, so frontier markets are not exclusive to one region. Some of the largest constituent countries include Argentina, Kuwait, Vietnam, Nigeria, and Romania.

According to FTSE, the market cap of securities in developed markets represents 90.9% of the total world market cap, while emerging markets represent 8.8%. Frontier markets comprise a mere 0.3% of the world's total market cap.

If investors wish to match their investments to the market cap of the world, it would not be out of place to round frontier markets down to 0% and split investments proportionally between the developed and emerging markets. In fact, many investors do just that and have no exposure to frontier markets. But there may be value in investing in frontier markets.

ADRs

For the do-it-yourself investor who dislikes ETFs and mutual funds, there are some opportunities to invest in frontier markets through US stock exchanges. Investing in individual securities from frontier markets is not for

This article was written by

Bottom Fisher Ideas profile picture
518 Followers
Bottom Fisher Ideas is an independent investor with an academic background in computer science and english from Cornell University and finance from New York University.  Bottom Fisher Ideas is halfway to retirement, seeks investment opportunities in out of favor areas of the market, and enjoys writing about the process along the way.

Disclosure: I am/we are long FM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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