Frontier market stocks



In 1992, Farida Khambata, an official at the International Finance Corporation, coined the term frontier markets for nations with smaller market capitalization and less liquidity than nations classified as emerging markets. Figure 1. provides a map showing the worldwide distribution of frontier markets. Frontier markets make up approximately 6% of world GDP and comprise 1% of world stock market capitalization.

Index providers began introducing frontier market indexes in 2007/2008. The S&P BMI Frontier Market Index, introduced in 2008, has data going back to 1995, based on individual country data. Most providers supply regional indexes that cover pan-Africa, the Americas, Europe and Central Asia, the GCC (Gulf Cooperation Council) and Arabian peninsula, and the Asian markets.

In 2011/2012 index providers began creating indexes designed for easier investment. Examples include indexes such as the FTSE Frontier 50; the MSCI Frontier 100; the S&P Select Frontier 40 and S&P Extended Frontier 150 indexes.

IShares launched the first index fund to track a geographically broad, focused frontier markets index (MSCI Frontier Markets 100 Index) in September, 2012.



Frontier market stocks
According to FTSE, the world consists of approximately 150 nations possessing stock exchanges. FTSE classifies 48 of these nations as either developed markets or emerging markets. The remaining countries are candidates for frontier market classification.

The majority of countries now included in frontier market indexes come from the following:
 * Former soviet and marxist economies establishing private markets and stock markets. These countries include many small states in Eastern Europe and in Central Asia. Viet Nam would also be included in this group.
 * Middle Eastern, Arabian peninsula and North African states establishing and opening stock markets to international investment.

Frontier markets have a short history of reliable data. Indexes of frontier market stocks provide four to eight years of live data, with backdated data going back to 1995.

Risk, volatility, correlation
Frontier market stocks encompass risks affecting emerging stock markets. These risks are magnified in the case of frontier markets. In addition to market and currency risks, frontier markets are especially susceptible to the following risks:


 * Political risks. Political instability can result from external conflict, coups, and racial and national tensions.
 * Economic risks. Economic policies and reforms can fail.
 * Regulatory and operational environment. The quality of market regulation, corporate governance, transparency, and accounting standards is often below that of developed markets.
 * Limits on investment. Foreign investment may be limited or taxed.
 * High industry/firm concentration. In frontier markets, a large share of a country’s stock market capitalization may be concentrated in a particular industry or company.

Frontier market indexes
FTSE, MSCI, Russell, and S&P provide indexes of frontier market stocks. The constituent country markets are included in the table below. As each provider defines the universe of emerging markets and frontier markets differently, countries appearing in one provider's emerging market index can often appear in another provider's frontier market index. When allocations are made to both emerging market and frontier market asset classes,  it is advisable to use the same provider's emerging market and frontier market indexes, thus avoiding unintended duplication of country holdings.

Frontier market index funds
A limited number of frontier market index funds are currently available to U.S. investors as ETFs. These funds include:


 * The Guggenheim Frontier Markets ETF invests" at least 80% of its total assets in American depositary receipts ("ADRs") and global depositary receipts ("GDRs") that comprise the Bank of New York Mellon New Frontier DR Index or in the stocks underlying such ADRs and GDRs." The fund has a 60% weighting in three countries included in most index provider's emerging market index: Columbia, Chile, and Eqypt. Thus, the fund holds a minority position in frontier market stocks.


 * The Powershares Middle East North Africa Frontier Countries Portfolio "invests 90% of its total assets in securities that comprise the NASDAQ OMX Middle East North Africa Index, and American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) based on the securities in the Index. The Index seeks to provide direct exposure to liquid stocks of companies that have the majority of their assets or services residing in MENA frontier market countries, which include Egypt, Morocco, Oman, Lebanon, Jordan, Kuwait, Bahrain, Qatar and United Arab Emirates." Thus the fund is essentially a middle eastern regional fund.


 * The ishares MSCI Frontier 100 Index Fund "seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Frontier Markets 100 Index." The fund exclusively tracks frontier market stocks. The fund has a 50% to 60% weighting to Gulf Cooperation Council countries, and a high 50% to 60% weighting in financial stocks.

Index providers

 * MSCI Frontier Market Indices, Retrieved 25 November, 2012
 * MSCI Frontier Markets 100 Index, Retrieved 25 November, 2012
 * Country Classification in FTSE Global Indexes, Retrieved 25 November, 2012
 * FTSE Frontier 50 Index, Retrieved 25 November, 2012
 * Russell Frontier Indexes, Retrieved 25 November, 2012
 * S&P Frontier Equity, Retrieved 25 November, 2012