3. Growth. Frontier markets are concentrated in the Middle East and Africa. Given recent unrest in that part of the world, investing in the frontier may seem like a bad idea. But while this region is volatile, it’s also one of the fastest growing areas in the world. In addition, the Middle East is, obviously, the big beneficiary of higher oil prices.
4. Diversification. EM stocks performed particularly weak during the most recent sell-off. Part of their relative under-performance can be attributed to fundamental issues such as concerns over Chinese banks. However, EM equities were also negatively impacted by their high correlation to the global stock market. Frontier markets tend to trade differently. Because they are less developed, they are less tied to the global economy and less correlated with the global market. As such, frontier stocks don’t always move in lockstep with the rest of the world.
My suggestion to consider frontier markets comes with a few important caveats. While the asset class has been less volatile than emerging markets overall, it still is volatile, and much more so than US stocks. In addition, frontier markets are a relatively new asset class, meaning its liquidity is still a work in progress and it’s not an asset class you want to trade in and out of. That said, in a world where even emerging market growth is slowing, many investors should consider broadening their definition of emerging market stocks to include some allocation to frontier markets, which are accessible through the iShares MSCI Frontier 100 ETF (FM).
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.
Disclosure: Author is long FM.