Introduction: The Allure of Frontier Markets
Especially in the context of the increasingly dynamic global economy, investors never lose sight of the next big idea. But ahead of it there is another and even less explored genre of economies steadily developing and holding an incredible opportunity—border markets.
Frontier markets are a new wave of investment and economic growth that has higher risk and expected returns than the developed markets. These countries are yet to industrialize, develop infrastructure and financial systems and therefore are relatively smaller and less stable compared to and more risky than the emerging markets. Hence, what makes anyone willing to invest in them? But let’s figure out what frontier markets are, what is waiting for us there, and how dangerous it could be.
What Are Frontier Markets?
Frontier markets are those countries relative to which the general economic and financial conditions are weaker than those in the emerging markets but they also have a lot of growth potential. They tend to be much smaller, less liquid and more risky than EM’s but they offer better returns since the economies of these nations are growing.
Some of the key characteristics of frontier markets include:
- Underdeveloped infrastructure: Many frontier nations are still in the process of developing their framework, including and especially the transport, power, and telecommunications.
- Low-income economies: Some of these markets have low giki total with per capita, which can be interpreted to mean that they can expand much faster as the move through the development GDP scale.
- Volatile political environments: Most frontier markets are characterized by political risks hence the additional risk for investors.
- Untapped investment potential: This is an advantage since it allows an investor to invest in frontier markets since most of them are relatively unknown and have not attained the international status of investing.
From the frontier markets, some of the most known countries are Bangladesh, Kenya, Nigeria and Vietnam.
Key Factors Driving Frontier Markets
There are some reasons that make frontier markets favorable for investments though come with risks.
1. Rapid Economic Growth
Frontier significantly grows at a higher post than developed and even some emerging markets. This is because of increased population, industrialization, urbanization and the increased population of the middle income earners.
For instance, Vietnam, which falls under frontier markets, has experienced phenomenal industrialization and urbanization in the last two decades achieving more than 6% GDP growth rates in most of the periods. This is through working capital generated by business both from foreign direct investment, manufacturing industry and a growing consumer market.
2. Demographic Advantages
Some of the frontier markets are relatively young when compared to developed countries; this is a big plus economically. Young population leads to increase in the pool of working populations hence an economic opportune. Besides, young people can spend more compared to other groups making them serve as consumers for various products.
For instance, Nigeria which is an African frontier market has a median age of about 18 years while in the United States it stands at 38 years. This is a very young population that provides a significant audience with growth opportunities.
3. Low Debt Levels
The level of national debt in most frontier markets appears to be low compared to the situation with developed and emerging markets. This makes them favored to undertake infrastructure, social and industrial development initiatives without necessarily feeling the pinch of repaying much debts.
This due to low debt levels such as the case of Kazakhstan have not only enabled the country to concentrate on infrastructure development but also on foreign investment drives.
4. Emerging Consumer Class
When the middle class emerges in frontier markets consumer spending increases on products, services as well as technology. This leads to increased market openings for the foreign companies to under-serve these markets as the consumers increase in number. Across these markets ranging from home care products to electronics, there is a rising demand and thus provides good opportunities for businesses.
Investing in Frontier Markets: Opportunities
That is why frontier market investing is comparatively more associated with risks than developed markets; however, risks are not devoid of opportunities for investors. Here’s why frontier markets can be a good idea for those willing to consider some extra risk to their investment.
1. High Return on Investment (ROI) Potential
Emerging markets are known to produce high returns, with returns on emerging markets potentially higher than that on developed markets. As a result of their fast growth, relatively less industrialized and cheaper human resource pool, value added may be higher in companies, located in such markets.
For example, while the frontier stock markets of countries such as Sri Lanka and Bangladesh have been rewarding investors higher yields in the recent past than some emerging markets.
2. Diversification Benefits
It enlarges portfolio choice frontiers and provides opportunities to incorporate assets that have low correlation coefficients with traditional developed or emerging markets. It can be of particular use in the unfavorable climate for foreign investments when the performance of the frontier market does not have strong correlation with the cycles of the world economy.
3. Access to Undervalued Assets
The stock, bonds, or even property that are found in frontier markets are cheaper than fairly priced securities in developed or emerging trapping markets. For those looking at the long-term horizon to make their investment decisions, they can easily purchase such assets at very cheap rates knowing very well that they will be of high value in the nearest future once the market for them has developed.
4. Growing Investment Infrastructure
Most frontier markets have the trend of establishing good financial and legal systems to embrace investment from overseas. For instance the Vietnamese market is liberalizing gradually to allow more foreign participation in the market which decreases risks and increases in liquidity.
Risks Involved in Frontier Market Investments
Yes, the idea of investing in frontier markets is not devoid of the risks. However, investors need to realize that the opportunities that are considered to possess a higher return include the risk factors.
1. Political Instability
Some frontier markets are politically volatile, and this could partly explain the level of risks investment in these markets attract. Policies can be reversed, and this is likely to foster unpredictability because governments can act in unanticipated manners as far as the foreign investors are concerned. For instance, Zimbabwe has been experiencing political instability that has made the country’s investment unfriendly for foreigners despite being naturally endowed.
2. Currency Risk
The other risk which is evident in the frontier markets is the currency risk. Fluctuations in exchange rates in these structures are high and unpredictable thus making it very hard for a foreign investment to accurately gauge the value of his investment in the foreseeable future.
3. Limited Liquidity
Liquidity is generally low in frontier markets making it quite hard to either purchase or sell securities in the markets. This can be regarded as particularly relevant in the context of low-some stock exchanges, where the number of players involved is considerably limited. Gearing may also cause investors to take longer to realise their holdings than they would wish thereby leading to an increased variability in price.
4. Lack of Transparency
One of the problems which can be observed in many frontier markets is the underdeveloped state of the regulation regime, which eventually makes it more difficult to estimate the exact condition of business. Lack of transparency can also endanger the investor and or company to fraud or corruption.
Popular Frontier Markets to Watch
Here are some frontier markets that are attracting attention from global investors:
1. Vietnam
Vietnam can be referred to as one of the most successful frontier markets due to the high economic growth experienced by the country as a result of the export led model. The government is also very passionate about trying to court foreign investors especially in the technology and manufacturing industries.
2. Kenya
Kenya is an economic powerhouse within the Eastern Africa region with the tech sector under development. It is also referred to as “Silicon Savannah” with emerging new generation start-ups and growing the financial market.
3. Nigeria
Due to the country’s abundant oil resources and populace population, investors interested in sectors Energy and consumer goods were naturally drawn to Nigeria. However, the country’s political instability along with infrastructural drawbacks relapse it all.
4. Bangladesh
The country has risen to become a frontier market to follow mainly as a result of its currently thriving garment business which forms a large part of its economy. This has ensured the country record higher Gross Domestic Product growth rates over the past years.
Conclusion
While investing in frontier markets represents one of the most attractive investment opportunities to investors because they allow them to invest in a group of high-growth economies that are at an early stage of development. These markets are characterized by a young population and the increasing propensity to consume. But the threat—from political risk to currency risk is higher than in a developed market or even an emerging market.
To the right buyer, they are more rewarding, offering high returns and diversification, but it does involve frontier markets investments and should be done carefully. Research, time and patience are important strategies when investing in frontier markets, as they present very high risk and very high returns.
