While some emerging markets are not so emerging anymore (take China, world’s second economy as one example), there is a group of new emerging economies that has been classified as frontier markets.
What are frontier markets?
Frontier markets offer opportunities once available in emerging markets of China, India, and Brazil. Frontier markets offer tremendous growth potential but are highly risky.
So what are frontier markets? Most countries in sub-Saharan Africa (except developed South Africa) fall into this category. Many of these countries are rich in natural resources. Moreover, there’s an untapped market for consumer goods as growing populations demand more. Sectors such as banking and telecommunications are also bound to grow.
This has been noticed and there’s a growing foreign investment in sub-Saharan Africa. China, especially, has been aggressively investing on that continent.
However, there are many risks. Take the rise of Islamic terrorism in countries like Nigeria, Ebola virus in western Africa, ethnic conflicts, and rapidly growing populations where many young can’t find jobs.
How to Invest in Frontier Markets
A simple and less risky way to invest in Africa is via mutual funds or ETFs. VanEck Vectors Africa Index Fund (AFK) invests on the entire African continent, including sub-Saharan frontier markets.
In addition to Africa, there are other markets. The examples include Cambodia and Vietnam, countries with low labor costs and relative stability. These countries are seeking to copy economic success of their Asian neighbors.
For those looking to diversify broadly, the iShares MSCI Frontier 100 ETF is another option. It invests in large capitalization frontier markets companies.
Frontier markets are a risky play, but with risk there is a potential of higher returns. Long-term investors should consider adding frontier market stocks to their portfolios both as a diversification tool and return enhancement.
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By seeking to become bigger quickly, frontier markets pose higher risks