To be sure, frontier markets are still a very volatile asset class and investors should be mindful of the typical risks associated with these exotic markets, which are still at early stage of economic development. These risks include political instability, corporate governance issues, high inflation and low liquidity. Frontier markets are a relatively new asset class, meaning liquidity is still a work in progress and it’s not an asset class you want to trade in and out of. Moreover, since many frontier countries hold the majority of their reserves in commodities, falling commodity prices also represent a risk to the markets.
What does this mean for investors? While frontier markets can potentially be a good source of portfolio diversification and are worthy of an allocation, allocations to them should be small given the risks involved, with the exposure amount varying depending on an investor’s risk tolerance. Still, I continue to advocate that investors expand their definition of the emerging world to include frontier markets. The bottom line: Frontier markets and emerging markets are not created equal, and they both deserve a spot in investors’ portfolios.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.
Sources: Bloomberg, BlackRock research