Frontier markets have been a hotly debated topic for a while now. They are interesting to watch, especially as we look at a world that is rapidly developing and evolving. It’s true that there are risks associated with frontier markets. However, they do offer a fair share of unique opportunities as a balance. It’s important to weigh up the pros and cons in order to identify whether or not a Frontier Markets investment is right for you.
What is a Frontier Market?
A frontier market is generally considered to be an equity market of a country that is in the early stages of economic development. It has less liquid financial markets and a lack of foreign investor access compared to other developed countries. Essentially, its uncharted territory, a new frontier. Investing in frontier markets can be lucrative, but it’s important to consider all the risks before one commits to any financial decision.
Frontier markets have their fair share of opportunities that make them an interesting investment option. Here are some of the key factors which contribute to the investment potential of frontier markets.
Demographic diversity is a key component of frontier markets. Generally speaking, the primary demographic in a developing country is often young innovators. They bring an economic vitality which makes investment highly appealing. There are also low labour costs associated with a frontier market, making investments inexpensive compared to more developed countries.
High potential growth is also one of the big hallmarks of frontier markets. Because the country is rapidly developing and growing, the potential to see a return on investment quickly is comparative.
Generally speaking, frontier markets are cut off from the rest of the global economy, so they’re not dependent on anything in order to thrive. Much of their economy and resources are within the country, and this protects them from economic crises during the critical development period.
Furthermore, developing countries are often rich in natural resources and minerals. They are an untapped “vein” much akin to striking oil in the desert, and it creates a lot of investment opportunities. Copper, zinc and bauxite are often plentiful, as are chemicals used in substances like fertilisers.
Investors who are clever can put their capital in places that are primed to grow in a short period. Even small growth in frontier markets has the potential to generate good returns.
The Risks of Frontier Markets
Frontier market investment can be a smart investment option, but it is not without risks. It’s important to understand these risks, as while they do not make the concept entirely unappealing, they are essential for a balanced view of the opportunities present.
Political instability is one of the primary factors that must be considered in a developing country. While the countries are still new and growing, various political factions will vie for power.
While the political details themselves are often unimportant, the thing that investors have to watch out for is whether or not the political actions influence the value of investments. If a new group comes to power that doesn’t focus on the market that an investor has put assets into, they may find that return on their investment diminishes or is even completely eradicated.
Naturally, a growing country with a lack of an established economy is also subject to volatility. While there are some asset classes that could be considered safe in general, like real estate, there are also commodities that are much more volatile and prone to developing high risk, high reward scenarios.
Furthermore, a fledgling economy is also subject to currency fluctuations. The value of the currency can go up and down depending on the success the country has actually growing, which is problematic for anybody making an investment. It’s not necessarily a dealbreaker; it’s just something to consider.
Finally, at a more fundamental level, it’s important to remember that frontier markets don’t have a lot of regulations. The countries aren’t developed enough to have first world regulations concerning investments, so it is a bit of a Wild West scenario. You may find that some of the rules and etiquette that you are accustomed to making investments elsewhere won’t apply, which means that you have to be particularly sharp and aware of every risk that is present.
A frontier markets investment fund can be a healthy part of a diverse investment portfolio. There are opportunities, but there are also risks, as is the case with any type of investment. Anybody who is considering investing in frontier markets should consult with a professional to get expert advice prior to making a decision. Making an investment without guidance is often foolish and can lead to financial loss. Frontier markets present a diverse array of investment opportunities, but require a keen understanding of all the risks before investing.