Frontier markets have been in the news as of late mostly because of how well they’ve performed, especially compared to emerging markets.
As of August 29, the MSCI Frontier Markets Index was up 10.8% on a year-to-date basis while the MSCI Emerging Markets Index was down 12.7%.
Like emerging markets, frontier markets have incredible growth potential.
The International Monetary Fund projects that emerging market and developing countries will experience GDP growth of 5.4% in 2014. In the same period, Canada’s GDP is expected to rise 1.7% while advanced economies overall are forecast to grow 2.1%.
Despite a strong outlook, investing in frontier markets may not be worth the effort.
A recent report from Vanguard notes that as individual countries within a frontier market index mature and grow, they’ll likely graduate to an emerging markets index. “This implies that growth in a frontier index may be limited.”
Also, there are lingering concerns about reduced liquidity.
BlackRock recently wrote that while the MSCI Frontier Markets Index has a lower price-to-earnings ratio, a higher dividend yield and lower volatility than the MSCI Emerging Markets Index, the problem is that the markets are hard to access and exit.
“Although the upside for frontier market investing may look attractive, the challenges and risks can be significant,” states the Vanguard report. “For most investors, the downside of frontier market investing would appear to outweigh the benefits.”