Emerging Markets Plus: The Plus of Frontier Markets

Most professional investors such as institutions, high-net-worth individuals, endowments, and family offices wish to have international diversification and exposure to emerging and frontier markets in their portfolios. When countries depend on growth in different economies with different activities and consumption patterns, this leads to less than perfect correlation of their economic performance. Investing in several uncorrelated countries thus reduces risk in a portfolio. But this is not the only reason for exposure to frontier markets. Fund ma nager Mark Mobius, who oversees more than US$40 billion in emerging-market assets at Franklin Templeton Investments, believes frontier markets represent what the BRICS countries were 20 to 25 years ago.1 They offer growth prospects for the future when established markets may stagnate. Investment professionals such as Mobius have sought exposure to frontier markets for a long time. It is only recently that retail investors have access to these markets as well. Frontier markets offer attractive long-term prospects to global investors. However, most currently available retail investments lump all frontier markets together and exclude most of those in the ASEAN. In reality, frontier markets are diverse. Their cultures, people, and languages differ, their economies and available resources also vary widely. As a result,KeywordsMutual FundPrivate EquityEquity MarketVenture Capital FundRetail InvestorThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Chapter 11 - Impact of US Federal Reserve Policies on Frontier Markets

In order to examine the fundamental quality of companies with listed equities in the frontier markets relative to the emerging markets, a Quality Z-score was constructed of four commonly used financial metrics applicable in each sector. The frontier markets have shown above-average fundamental quality, as defined by these measures in terms of higher capital efficiency, lower indebtedness, and greater balance sheet strength and capitalization relative to the mainstream emerging markets. The fundamental quality of the frontier market universe as defined by these measures has declined relative to the emerging markets over the period from 2001 to 2012. Fundamental quality is less priced-in to the frontier markets than it is in the emerging markets, as demonstrated by a lesser premium in terms of price-to-book ratios between the higher and lower quintiles of the Quality Z-score. By the end of October 2014, above-average quality companies in the frontier markets traded at lower price-to-book ratios than below-average-quality companies in the emerging markets. While higher-quality companies did not achieve greater market returns in the full period of study in emerging markets, quality companies did outperform in the frontier. In addition, quality companies outperformed in both categories during the high volatility period post-2008, suggesting that fundamental quality may provide some degree of protection from market declines. The outperformance of higher-quality companies in the frontier markets, combined with the relatively low valuation premium for higher fundamental quality, may continue to drive active portfolio managers into higher-quality frontier stocks.

Role of emerging markets vis-à-vis frontier markets in improving portfolio diversification benefits

International diversification with frontier markets

Chapter 8 - Investing on the Edge: Exploring the Opportunities for Diversification in Frontier Markets

Handbook of Frontier Markets

Frontier countries accounted for 21.6% of the world's population, 6% of its nominal GDP, and only 3.1% of the world market capitalization. Thus, it is imperative that a global investor following indexing style of fund allocation should allocate 3.1% of its wealth in the frontier markets. However, a typical frontier market is characterized as highly volatile and illiquid. In addition to the volatility and illiquidity of the equity markets, impulsiveness of their currencies inflict heightened risk for the international investors. Thus, a case to case analysis of frontier markets makes sense for an active portfolio investor. The present paper explored the opportunities and challenges of equity allocation in frontier markets in general and Vietnam, in particular, evaluating their macroeconomic factors and investigating into the micro structure of their financial markets. The results suggested that there was a higher correlation of frontier markets and Vietnam market returns with the world market returns, coupled with low indigenous mean returns, high standard deviations, and coefficients of variance. This explained why there is lower allocation of global capital to the frontier markets in general and Vietnam in particular.

Chapter 14 - Empirical Assessment of the Finance–Growth Nexus in Frontier Markets

The authors investigate whether the diversification benefits of frontier markets are realizable. They focus on investable frontier exchange-traded funds (ETFs) and their corresponding indices. Their analysis ncludes directly measuring the economic benefits of frontier-market diversification, as well as considering frontier-market trading dynamics. Evidence indicates that frontier markets offer diversification benefits through risk-reducing potential. The authors find that frontier market volatility tends to be largely idiosyncratic, which supports the risk-reducing role of frontier markets. Their comparison of funds and indices indicates that, to the extent that frontier-market indices offer hypothetical benefits, traders can obtain these benefits by using investable funds.

Using the Morgan Stanley Capital International index monthly data for 28 frontier markets during the period between January 2011 and December 2018 the paper investigates the impact of skewness on portfolio selection. The existence of skewness in returns distributions is illustrated in terms of frontier markets. The skewness ranks matrix is developed. It demonstrates that only 6 markets can be regarded as not skewed from USD and 11 – from EUR perspective. The study does not find strong evidence on positive or negative skewness character. All in all, skewness for local currencies is slightly higher than for foreign currencies. It is the factor of international portfolio investing in frontier markets but its impact should not be overestimated. Analytical framework for skewness-based investing in frontier markets is developed. It does not indicate strong evidence that skewness is a more important portfolio selection factor for international investments than for domestic ones. Skewness is rather more relevant for domestic portfolio investing. Using the approach of relative foreign exchange percentage differential, the study proves the more notable impact of skewness for EUR than for USD international investors. As to the preferable moment, the found evidence is weak but rather in favor of skewness than return for local investing and in favor of return for international investing.

Time-Varying Risk and Risk Premiums in Frontier Markets

Frontier market transaction costs and diversification

This study examines the stock market integration in cross-regional countries of developed, emerging, and frontier markets based on low correlation. The objective of the study is to identify the diversification opportunities and link between correlation and integration among country-level stocks. For this purpose, we select 62 countries from all three classifications of developed, emerging, and Frontier Markets. We constructed portfolios by selecting least 5 correlated countries denoted with Pjt in which each country has a correlation of less than .10 with base country Pit. Thirty-two countries fulfill the criteria of low correlation; 7, 13 and 12 from developed, emerging and frontier markets, respectively. Panel co-integration and VECM are applied to test the stock market integration and long & short-run linkages between country-level portfolios designed based on low correlation criteria. After conditioning for oil price movements, S&P 500 and exchange rate, we found Canada, France and Germany from developed category; Chile, Colombia, Greece, South Korea, Malaysia, Pakistan and Philippine from emerging category; and Bahrain, Jordan, Kuwait, Morocco, and Sri Lanka from frontier category have long-run diversification opportunities. Countries including; Canada and Italy from developed category; Argentina, Chile, China, Colombia, India, Indonesia, South Korea, Mexico and the Philippine from emerging category; and Bahrain, Kuwait, Morocco, Nigeria, and Tunisia from emerging category have short-run diversification opportunities.

This study examines the stock market integration in cross-regional countries of developed, emerging, and frontier markets based on low correlation. The objective of the study is to identify the diversification opportunities and link between correlation and integration among country-level stocks. For this purpose, we select 62 countries from all three classifications of developed, emerging, and Frontier Markets. We constructed portfolios by selecting least 5 correlated countries denoted with Pjt in which each country has a correlation of less than .10 with base country Pit. Thirty-two countries fulfill the criteria of low correlation; 7, 13 and 12 from developed, emerging and frontier markets, respectively. Panel co-integration and VECM are applied to test the stock market integration and long & short-run linkages between country-level portfolios designed based on low correlation criteria. After conditioning for oil price movements, S&P 500 and exchange rate, we found Canada, France and Germany from developed category; Chile, Colombia, Greece, South Korea, Malaysia, Pakistan and Philippine from emerging category; and Bahrain, Jordan, Kuwait, Morocco, and Sri Lanka from frontier category have long-run diversification opportunities. Countries including; Canada and Italy from developed category; Argentina, Chile, China, Colombia, India, Indonesia, South Korea, Mexico and the Philippine from emerging category; and Bahrain, Kuwait, Morocco, Nigeria, and Tunisia from emerging category have short-run diversification opportunities.