Investors exploring frontier markets are the true trailblazers of the global market. Profiting from frontier markets requires patience, capital, and an affinity for venturing into uncharted financial waters. However, these markets can yield high returns, enticing ambitious entrepreneurs and corporate investors alike. This article defines what frontier markets are and discusses seven ways you can utilize them to amplify your portfolio.
What Are Frontier Markets?
As the global market expands, investing in emerging markets has become more profitable. Frontier markets are emerging market countries that lack steady liquidity and stability but offer excellent potential returns. These markets may suffer from underdeveloped stock exchanges and offer fewer security nets for investors, and little experience with capital returns.
There are several traits that entice investors, such as rich resources, uncharted growth, and a large population of youthful workers. Like larger emerging markets, investors take several factors into consideration before moving forward, such as per capita GDP, population growth and health, urbanization, and ease of business. If you think you’ve found a hidden gem, take these factors into consideration. While this will not guarantee you a profitable return, it may help you make an educated decision before you invest.
7 Ways to Use Frontier Markets in an Investment Strategy
#1. U.S. Companies Expanding to Frontier Markets
Purchasing shares in American companies that plan to expand into frontier markets is a relatively low-risk way of jumping into a volatile emerging market. In some cases, these companies may develop their workforce overseas, such as Mexico for the automobile industry or Vietnam for apparel.
Other companies may target frontier markets because of rapid growth in the middle class. Tech companies have their sights set on African frontier markets. Although the increase in revenues isn’t huge, it’s very promising. For example, the African market accounts for 5% of Microsoft’s total revenues.
There are some downsides to investing in frontier markets through established stocks; the yield is usually slower than direct investing and, because you’re investing in top American companies, the buy-in is usually expensive.
ETFs, or exchange-traded funds, are the most common method of investing in frontier markets. ETFs are less risky than purchasing individual stocks and bonds and can give you the flexibility to invest in an individual country or an array of frontier markets. In addition, ETFs usually only focus on frontier markets with relatively stable liquidity.
Like stocks, you can sell your share at any time, at the current market value. The most common frontier market ETFs is iShares MSCI Frontier 100 ETF, Vanguard FTSE Emerging Markets ETF, and Global X Next Emerging & Frontier ETF.
#3. Mutual Funds
Mutual funds also allow you to invest in frontier markets with minimized risks. Like EFTs, you can choose mutual funds that either focus on specific countries or contains a more diverse portfolio. If you plan on investing long term, a mutual fund may be your best option.
Mutual funds are managed by knowledgeable account managers. They are not subject to commission charges. Moreover, they allow you to invest money directly from your affiliated bank account. The most common mutual funds for frontier markets is Morgan Stanley Frontier Emerging Markets Portfolio, Ashmore Emerging Markets Frontier Equity Fund, and Wasatch Frontier Emerging Small Countries.
#4. Purchasing Real Estate
Some frontier markets are so underdeveloped that they are not established in the global stock market yet. In these cases, some investors turn to real estate. If the country is expected to urbanize quickly and has a rapidly-growing middle class, investing in the real estate market can yield a quick return.
Real estate can be highly lucrative but is not without substantial risks and difficulties. The real estate market is highly dependent on political and environmental factors. Also, each country has its own laws governing foreign ownership of real estate.
#5. Expand Private Business
Many developing countries are showing an increase in consumer goods consumption as the middle class grows. If you’re a small business owner, consider developing your products to frontier markets. Expanding your business to another country can be very challenging; it requires extensive research, networking, and a direct knowledge of the country’s economic and social trends. Consider selling your products to partners to establish your market and assess the demand.
#6. Purchase Stock Independently
If you’re an experienced investor and you have insider knowledge of a frontier market that hasn’t established adequate liquidity, buying your own stock can be an option. Investing in frontier market stocks can be time-consuming. As your own account manager, you need to be finely in tune with the events in your frontier market and have the perception to pull out when necessary.
#7. Provide Private Equity to Frontier Market Businesses
If you own a private equity firm or are an accredited investor, you can provide capital to private firms in a frontier market. Large investment firms, such as Blackstone and Carlyle, have already begun to reap the benefits.
Following their example, try to invest in ventures that your firm is already familiar with or focus on sustainable growths, such as infrastructure and consumer goods. Private equity can be a risk for smaller investors, but it yields direct returns and long-term relationships.
Big returns often require big risks. Frontier markets represent nearly untouched opportunity with a lot of room to grow and expand. Even if you are concerned about the risks of investing in frontier markets, there are several options available, such as buying stock in expanding American companies, ETFs, and mutual funds.
If you prefer a more hands-on approach, you can dive into the real estate market, grow your business, provide private equity to local businesses, or purchase stocks. If you see the benefit in investing in frontier markets, share this article to assist other potential investors.