According to Tony Arnerich, chief executive and chief investment officer of Arnerich Massena, frontier markets are individual nations that have a stock market, but are at an earlier stage of economic development than emerging markets. “While developed countries struggle with overleveraged debt and declines in consumer spending, nations on the frontier of economic development offer a fresh slate for growth potential,” Arnerich said.
Home to 1.2 billion people, frontier markets share some features. Urbanization is just beginning in many frontier countries, leading to the development of a private sector and growth in middle-class consumers. Frontier nations tend to have younger populations than developed countries, meaning the labor force is growing, along with domestic demand for goods and services. Economic growth expectations for a number of frontier market countries are impressive, while at the same time, they may be more vulnerable to corruption and political and economic crises.
“Participation in the opportunities of frontier markets comes with some inherent risk, namely volatility and liquidity constraints,” Arnerich said, “and while we are well aware of the heightened risk, we believe that macroeconomic trends are favorable to this universe, and micro-trends in some of these areas offer potential rapid growth.”
Several factors make frontier markets interesting for investors:
- The low valuations and high-dividend yields of frontier markets are attractive;
- Many frontier markets are rich in raw materials and energy resources that are still largely untapped, yet will be in high demand to meet the developing world’s economic expansion; and
- Whereas globalization and macroeconomic shifts in the developed world have made it more difficult to achieve portfolio diversification, frontier markets, influenced by local and regional economics, are an opportunity to more deeply diversify a portfolio.
“Seeking the Investment Frontier” can be downloaded here.