We believe that investors should consider emerging markets (EM) exposure as part of the long-term core of a diversified portfolio. In mid-2014 we noted an opportunity in frontier markets (FM) based on near-term momentum and valuations, which may have been attractive to EM investors looking to expand their international footprint. However, given recent volatility driven by low oil prices, a strong U.S. dollar and continued political instability in some of the largest FM countries, we urge investors to proceed with caution in the near-term. We continue to believe in FM as a potential long-term growth opportunity, but caution that near-term volatility could exceed the risk tolerance of many investors.
Background: Frontier Markets
Countries classified as “Frontier Markets” are at relatively early stages of development. As a result, these markets can potentially offer growth opportunities and increased diversification for investors. However, they may also have greater political instability, which may result in increased volatility versus developed markets.
Below is a closer look at the reasons we believe in the FM investment case over the long term.
DEVELOPED, EMERGING AND FRONTIER MARKET COUNTRIES
Potential for long-term growth
In contrast to the aging and shrinking populations of many Developed Market (DM) and EM countries, the populations of FM countries are generally young and growing. FM countries:
- Represent 30% of global population and have above average income growth1
- Are forecasted to be among the world’s fastest growing economies
- Generally have untapped natural resources which could spur job creation and increased consumption
A true diversifier
Taken as a whole, frontier markets have had a fairly low correlation to both DM and EM returns, and can potentially serve as a significant diversifier. While individual frontier market countries can be quite risky, the fact that they have shown only modest correlations to each other over a five year period can have the effect of minimizing overall risk. 2
||S&P 500 TR
|5 Year Correlation
to MSCI FM 100
Investing in Frontier Markets
Investors with a high risk tolerance may want to consider exposure to frontier markets for the long-term. The iShares MSCI Frontier 100 ETF (ticker: FM) provides access to 100 of the largest, most liquid frontier market stocks (in underdeveloped financial markets where liquidity is key). It also has the distinction of being the only pure frontier markets ETF based on MSCI classifications.