Tripling Returns: Investing in Frontier Markets

In the pursuit for successful investments, investors from all over the globe are in for a very tight competition. In developed countries where growth rates tend to be more stable, it is difficult to gain bigger investment returns. During such times when investing in highly urbanized and highly developed countries can result in smaller returns especially during the division of countries amid recession, a more interesting and smarter alternative is to invest in frontier markets.

How you could profit from frontier markets

According to Asha Mehta, portfolio manager at the Acadian Asset Management, frontier markets are a “particularly attractive emerging asset class” owing to the fact that they “offer inexpensive valuations, … low correlations with other asset classes, and prosperous long-term economic and earnings growth.” These characteristics make investing in frontier markets a good move for foreign investors.

In the first week of August 2014, the MSCI Frontier Markets Index had risen to 19%, a good statistic compared with the 6% rate in the MSCI Emerging Markets and the 2.2% rate in the MSCI World (NYSE:URTH) benchmark. These figures, as referenced from the Wall Street Journal, indicate that frontier markets are becoming one of the world’s best economic performers, attracting more and more investors and increasingly becoming competitive both locally and globally.

At first glance, an investor might be hesitant to consider the frontier market as a potential niche for a hugely growing investment. On the contrary, however, frontier markets actually offer rich opportunities that would allow investors to amass greater investment returns than what they could gain from investments in first-world nations. Some of the characteristics of frontier markets that allow greater investment returns are as follows:

High levels of economic growth. As frontier markets on still the process of urbanization, the economic growth rates of these countries are steep. This allows them to generate doubled or tripled returns, which will be sustained in the following years. This economic growth rate increases even more while frontier countries increase infrastructure spending, produce favorable demographics, and implement economic policies that clearly indicate their openness for foreign investments.

High diversification. Frontier markets are characterized by high diversification, as opposed to emerging markets such as Brazil and China, whose markets are becoming increasingly correlated and interconnected with the equities of the United States and European countries.

Less volatility. Frontier markets have been showing less volatility in the previous years. According to the data published by the Market Realist Web site, the volatility of frontier market as measured by average annual standard deviation was 20.38% in May 2002 to April 2013. This value is less than the 24.07% volatility measured for the MSCI Emerging Markets Index.
In conclusion, frontier markets offer investors a real opportunity to establish successful investments while securing sustainable economic development to further contribute to the nation’s growth. Investing in frontier markets would potentially double or even triple investment returns, especially in the longer term, when developing countries become more equipped to achieve improved economic stability.