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Frontier emerging markets (FEMs) encompass over 130 diverse and heterogenous nations. They are generally smaller, less developed and less accessible than their emerging market peers, yet account for 19 of the 20 fastest-growing nations globally.1 Their population is expected to grow by 37% by 2050.2 We believe this rapid growth sets the foundation for solid development, which will make them a larger part of the global economy, representing an attractive investment opportunity.

Key takeaways:

  • FEMs encompass over 130 diverse and heterogenous nations. They are generally smaller, less developed and less accessible than their emerging market peers, yet account for 19 of the 20 fastest-growing nations globally.
  •  FEMs have a large, young and growing population, which by 2050 is expected to grow by 37%. Almost three-quarters of economic growth in these economies is derived from consumption, which is expected to grow significantly in the 2023–2028 period.
  • Contrary to investor perceptions, correlation among FEMs is lower than among emerging markets (EMs), due to their heterogeneous nature. This can lead to lower portfolio volatility. Our analysis of drawdowns over the past five years indicates FEMs have lower drawdowns relative to EMs. 
  • FEM investors can benefit as the equity index of a country grows to the point of being reclassified to EM status. Investors can thus realize these gains and recycle them into undervalued opportunities in the index.

In this report, we focus on investable early-stage developing FEMs. They are often said to be at the stage of development that today’s emerging markets were at 25 years ago, with many of them having the same characteristics as emerging markets including India, Brazil and China.

Endnotes

  1. Source: World Economic Outlook Database, International Monetary Fund. April 2023. This ranking is based on real GDP growth and excludes countries with a population of less than 10 million as well as Iraq and Afghanistan.
  2. Sources: UNDESA, Macrobond. UN World Population. There is no assurance that any estimate, forecast or projection will be realized.

 

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.

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Companies in the infrastructure industry may be subject to a variety of factors, including high interest costs, high degrees of leverage, effects of economic slowdowns, increased competition, and impact resulting from government and regulatory policies and practices.

Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

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