December 22, 2022

Frontier Markets 101: Helpful Facts For Investors

Investment in Africa

If you’ve been looking for new ways to expand your portfolio, investing in frontier markets can be an option to consider. While these markets can be riskier than investments in developed markets, there are some excellent opportunities available.

Market Classifications: What Is A Frontier Market?

Several organizations classify markets including MSCI (Morgan Stanley Capital International), S&P Dow Jones and FTSE (Financial Times Stock Exchange). Many factors are considered when classifying countries including political stability, ease of market access, liquidity and more.


Typically, the more stable the government and the economy, the more likely the country will rank as developed or emerging, although this is not always the case. For instance, Iceland is considered a frontier market, yet it boasts one of the highest standards of living on the planet and has a stable government. Yet, access to its market is limited, thus it is not yet classified as a developed market.


Market status is updated frequently, and while changes are rare, they do sometimes happen quickly. Russia is a prime example of a country whose status changed almost overnight. After the invasion of Ukraine, Russia was downgraded from an emerging market to either a standalone market (MSCI and S&P Dow Jones) or simply removed from classification lists due to the high level of political instability in that country.


In some cases, such as with Greece, this nation was upgraded to developed market status but after the nation experienced a severe economic downturn, Greece was downgraded to emerging market status.


Frontier Markets In Africa

In Africa, which is the area we concentrate on here at Money Watch Africa, two nations have attained emerging market status. These include Egypt and South Africa, both of which maintain relatively stable governments and market access is greater than it would be with a frontier market.


While investing in an Egypt ETF or South Africa ETF can be a good option to consider, more and more African frontier markets are opening up to investors, so lets take a look at the frontier market countries on this diverse continent.


The West African Economic and Monetary Union (WAEMU)  This group of nations includes Benin, Burkina Faso, Cote dIvoire, Guinea-Bissau, Mali, Niger, Senegal and Togo. The WAEMU is classified under frontier status by MSCI but is limited to securities in Benin, Burkina Faso, Cote DIvoire and Senegal.


Botswana  This landlocked nation in southern Africa is ranked as a standalone market by MSCI and as a frontier market by S&P and FTSE. As with many African nations, Botswanas economy is growing quickly and is a top exporter of diamonds as well as minerals such as gold, copper and nickel.


Cote dIvoire  Cote dIvoire is listed as an MSCI frontier market as part of WAEMU, and both S&P and FTSE classify this nation as a frontier market on its own. Located in West Africa, this nation has one of the regions most stable economies and is the worlds top exporter of cocoa beans as well as a top exporter of cashews, palm oil and coffee.


Ghana  Located in West Africa, adjacent to Cote dIvoire, Togo and Burkina Faso, this nation is listed as a frontier nation by MSCI, FTSE and S&P. While Ghanas economic growth has not been as strong as some other frontier markets, Ghana is still a top exporter of cocoa beans, gold and other minerals.


Kenya  Ranked in frontier market status by MSCI, FTSE and S&P, Kenya boasts the largest economy in east-central Africa. With a strong and growing middle class, Kenyas economy is bustling, with many opportunities in telecommunications, infrastructure and mining.


Morocco  Morocco is ranked as a frontier market by MSCI, FTSE and S&P, and has one of the best quality-of-life scores on the African continent. Moroccos main exports include agricultural products, textiles and phosphate-related products.


Namibia  S&P ranks Namibia as a frontier market, and this Sub-Saharan African nation is a country abundant in natural resources with diamonds being a top export along with uranium, lead, tungsten and silver.


Nigeria  Nigeria is the most populous country in Africa and the seventh most populous nation on earth. Not surprisingly, Nigeria also has the largest economy in Africa and petroleum-based products are the nations top exports. MSCI, FTSE and S&P all rank Nigeria as a frontier nation.


Tanzania While only FTSE ranks Tanzania as a frontier market, this East African country consistently has enjoyed steady economic growth. Primarily focused on agriculture, Tanzania exports cotton, coffee, and cashews. Mining is another importunity industry, and gold mining is the top mining export.


Tunisia  This northern African nation is consistently listed among African countries with the highest standards of living and quality of life. Tunisia is ranked as a frontier nation by MSCI, FTSE and S&P. 


Zambia  This nation, ranked as a frontier market by S&P, exports about 70% of the copper found on the African continent. Agriculture is another top industry with sugar, tobacco and cotton being among the top exported crops.


Zimbabwe  Zimbabwe is listed as a standalone market by MSCI but remains unranked by S&P and FTSE. In general, standalone status can be a sign that a country is being looked at for a possible move toward frontier market status.


How To Start Investing In Frontier Markets

Investing in developed markets is extremely easy, and even emerging markets provide easier access for investors. With frontier markets, the options are more limited, but there are some good options to consider.


The easiest way to invest in frontier markets is to select either a mutual fund or exchange-traded fund that concentrates holdings in frontier market nations. These can be easily bought and sold by investors using an online brokerage firm or through your financial advisor.


For instance, you might look for an Africa ETF or a frontier markets ETF. ETFs are similar to mutual funds in that they tend to be heavily diversified, which can minimize risk. The advantage of an ETF is that this type of investment can be bought or sold throughout the trading day, whereas mutual fund values are set at the end of the trading day.


Other options include investing in Africa via American depository receipts (ADRs), which are certificates issued by U.S. banks and which trade on U.S. stock exchanges and represent shares in foreign companies. These often are subject to high fees and taxes, so its wise to talk with your financial advisor before opting for ADRs.


For investors with an abundance of capital, you also could consider looking at the investments offered by venture capital and private equity firms. This is a more costly and more complicated route than either ETFs or ADRs and not a great option for smaller investors, but if you are interested in making a substantial investment in Africa, this could be something to consider.


In general, investing in frontier markets is considered riskier than investing in developed and emerging markets. However, these markets also potentially can provide substantial yields. With an ETF or mutual fund concentrated on a frontier market, you tend to minimize risk as these are diversified.


Before making any investment decisions regarding frontier markets or any other markets, we always recommend researching the investment opportunity carefully looking at the holdings, the fund managers and the historical performance of the fund. 

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