Trend Report: Frontier Market Investments & How It Can Fit Into Your Portfolio

In finance, there are various markets where you can invest: the stock market, money market, bond market, or derivatives market. But have you heard of the frontier market? Unlike a stock market that focuses on stocks, frontier markets could involve real estate, stocks, bonds, and more. 

It’s important not to confuse “frontier markets” with “emerging markets.” Frontier Markets can feel like the wild west of investing. There are endless opportunities and massive potential if you’re willing to venture into the wilderness. A frontier market is more like an emerging “emerging market.” These smaller markets are primed for growth but aren’t considered emerging markets like Pakistan, China, or Saudi Arabia.

What is a frontier market?

Frontier markets generally have a combined market value of approximately $510 billion. Comparatively speaking, emerging market stocks have a value of around $20 trillion. Frontier markets are untapped, developing, and have an uncertain future that can be exciting and nerve-wracking. Some frontier markets in smaller countries include Oman, Serbia, Sri Lanka, Bangladesh, Croatia, and Lebanon. 

According to MSCI Inc., the world’s largest index compiler, an economy must possess some openness to foreign ownership and partial ease of capital flows to be considered a frontier market. 

These markets aren’t considered stable yet and lack standard legal and financial regulatory organizations, have reduced transparency, lower liquidity, and higher volatility. Frontier markets are often considered riskier investments because of this lack of regulation and security.

The investment benefits of a frontier market:

Despite a frontier market’s heightened risk and volatility, they hold their own benefits. Much like the wild wild west was a place for dreamers to create the life of their dreams, the reduced limits of a frontier market allow investors to “colour outside the lines” of a conventional portfolio. Frontier markets are commonly isolated from the global monetary system as they are still considered too small. Their size can protect them from global recessions and depression. Just look at the many emerging and established markets that are now impacted by the Russian invasion of Ukraine. 

Investing some capital into overlooked markets can further diversify your portfolio and protect it from global financial crises while helping markets that genuinely need the investment and are thankful. 

The potential for rapid and exponential growth in frontier markets also sets an investor up for monumental gains. Many smaller economies will continue to struggle for some time which could only decrease your investment capital without providing any gains. The trick is finding a frontier market on the edge of this rapid growth phase. 

Signs a frontier market is about to take off:

There is no precise formula to use when determining if a frontier market is about to take off; risk of political unrest or economic shift is always present. However, a few signs can indicate a viable investment. 

• Look for low per-capita GDP with institutions and workforce transformations taking place.
• Increased population growth leads to a healthy working-age population within a few years.
• Good health and education practices help the workforce population remain stable and allow citizens to gain the skills required for entrepreneurship and professional-level jobs.
• The expanded urbanization of smaller towns and cities means a healthy real estate market and workforce.
• The country has a growing ability to do business both domestically and internationally.

How to invest in frontier markets:

There are numerous ways to invest in frontier markets. Depending on the country, some investment vehicles will not be available to foreign investors. However, these are some of the best ways to invest in frontier markets.

Invest in business.

Investing in the economy of a frontier market through a business can be a great idea. This could mean starting your own business there if it’s possible or investing in a local business where you see potential. 

Look at exchange-traded funds (ETFs) and mutual funds.

Many fund management companies offer managed funds that invest in frontier markets. Morgan Stanley Capital International has a frontier markets ETF available for investors. This fund, called the iShares MSCI Frontier Markets 100 (FM), invests in numerous frontier markets. 

Invest in real estate.

Purchasing a foreign property is not always available to investors in emerging and frontier markets. There are regulations and rules associated with what you can buy in some countries. However, investing in real estate by purchasing a foreign property can be a great investment strategy. However, foreign real estate ownership comes with increased risk and can be very labour intensive and frustrating. Many foreign investors in real estate recommend living in the country first to see if a real estate investment such as building rental housing will prove lucrative. For many investors, a real estate fund is the answer. The fund allows them to invest in frontier market real estate developments without taking on the headache of managing the project or the building themselves. 

Real estate funds, or mortgage pools, are an excellent way to invest in frontier markets, emerging markets, and developed markets. The nature of a fund means more diversification and thus more protection. Instead of sinking all your money into one project, your investment is spread amongst various projects, providing more security. 

If you’re interested in learning more about investing in a mortgage fund, get in touch with Jordan on our team today.