Think of them as emerging markets 2.0. Frontier markets in Africa, Asia and the Americas are fast becoming the next generation of growth in the global economy. Investors hope they will follow in the footsteps of their emerging forebears, treading the same double-digit growth path. And these days, the frontier market story is becoming a relatively easy one to tell: while investors have for years shied away from these markets based on fears of political and regulatory risk in some markets, the global financial crisis has turned our assumptions about risk around, especially as European economies such as Greece’s continue to unravel.
Demographics are also on their side—key frontier markets like Vietnam, Bangladesh and Pakistan are all benefiting from the so-called “demographic dividend,” boasting some of the youngest and fastest-growing populations in the world. All that contributes to an increasingly competitive labour force, especially compared to emerging markets like China where workers are aging fast. Natural resources are also plentiful in many of these—another factor that has been helping them grow.
Just how ready investors are to embrace frontier markets remains to be seen as we watch the response to iShares new frontier markets exchange-traded funds. The iShares MSCI Frontier 100 Index Fund will, as the name suggests, follow the MSCI Frontier Index, which tracks the performance of 100 stocks from 31 “frontier” countries around the world, including Vietnam, Pakistan, Kuwait, Kenya and Botswana. According to MSCI, constituents in the index must meet a minimum liquidity level and is limited to 100 at the time of an index review.
Pension funds are already exposed to emerging markets equities and, for some at least, frontier markets are beginning to appear on the radar screen. But as emerging markets mature and opportunities for alpha start to decline, investors will no doubt get ready to turn to the next generation—and frontier markets will be waiting.