If emerging markets are the wild child of the investment family, offering potentially higher rewards in return for greater risk, then what about their smaller sibling, frontier markets? These include countries such as Sri Lanka, Kazakhstan and Nigeria where stock exchanges and currency markets are too small or underdeveloped to be classified as emerging markets. While frontier markets may bring investors more exotic thrills, and spills, they also somewhat counterintuitively can be a safe haven when markets are rocky.
1. What are frontier markets?
In the investing hierarchy, they are the bottom rung of three. At the top are developed markets (such as the U.S. and U.K.), in the middle are emerging markets (such as China and Russia). The denomination is not so much a judgment on a country’s wealth or stage of development as about its markets. Depending on who’s doing the classifying, there are around 30 frontier markets, mostly in the Middle East, Asia, Africa and Eastern Europe.
2. How are they determined?
According to MSCI Inc., the world’s biggest index compiler, frontier markets need to meet subjective criteria, including “at least some” openness to foreign ownership and “at least partial” ease of capital flows. Objective requirements include having at least two companies worth $700 million each.