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A frontier market is a term for a type of developing country's market economy which is more developed than a least developed country's, but too small, risky, or illiquid to be generally classified as an emerging market economy. The term is an economic term which was coined by International Finance Corporation's Farida Khambata in 1992. The term is commonly used to describe the equity markets of the smaller and less accessible, but still "investable" countries of the developing world. The frontier, or pre-emerging equity markets are typically pursued by investors seeking high, long-run return potential as well as low correlations with other markets. Some frontier market countries were emerging markets in the past, but have regressed to frontier status.
Members could be considered to fall roughly into three groups:
The term pre-emerging markets is sometimes used as a synonym for "frontier markets", emphasizing the expectation that they will eventually "graduate" to "emerging market" status.
A 2021 analysis proposes the term emerged to describe markets, economies, or countries that have graduated from emerging market status, but have not yet reached the level equivalent to developed countries.
The implication of a country being labeled as Frontier is that, over time, the market will become more liquid and exhibit similar risk and return characteristics as the larger, more liquid emerging markets.
According to frontier market investors, frontier assets would actually diversify and reduce risk, which contradicts the general notion that risk would be added by including those markets.According to Marek Ondraschek, Founder of Zurich-based ALNUA Investment Managers and former CEO & CIO of Swiss Life Asset in a video interview.
Those who have a focus on frontier markets have different views on what the future holds for the inter-correlation of countries within the asset class. While they share some economics characteristics such as young, increasing educated populations, the individual economies face different internal and external forces. Funds invest to find returns in countries that have increasing trends in domestic consumption but see the overall growth drivers for each country as being different. This investment thesis holds water as it is unlikely that a manufacturing based economy, such as Bangladesh, would respond in the same way to external shocks as an island nation where a large proportion of the economy is linked to tourism, such as Sri Lanka.
There are also other non managed ways to gain exposure to these markets that are more generic such as investing in frontier market indices such as MSCI Frontier Index that only invest in large liquid stocks.
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