March 22, 2023

MSCI Frontier Markets: How To Mitigate Potential Risks

Investing in MSCI frontier markets can be a lucrative option for investors seeking high-growth markets. However, investing in these markets does have some significant risks, including political and economic instability. Let’s explore these risks as well as how one might mitigate these risks when investing in a frontier market.

How Are MSCI Frontier Markets Classified?

MSCI, which stands for Morgan Stanley Capital International, is an investment firm and one of several organizations that create market classification lists. Others include S&P Global Ratings and the Financial Times Stock Exchange (FTSE). MSCI, and these other groups, include three main categories for countries – Developed, Emerging and Frontier.

In general, developed, emerging and frontier markets tend to be categorized as such due to several factors. These include the stability of the country’s economy and currency, the political stability of a county and the ease of access to investments and stock markets in the county.

Developed markets are considered the most stable and least risky, investment-wise. They offer greater access to their stock markets than emerging or frontier markets and tend to also have greater political and economic stability, which can minimize overall risk.

Of course, as we’ve seen in recent days with the collapse of Silicon Valley Bank and First Republic Bank, there’s never any guarantee that an investment in a developed country is without risk. Mismanagement can occur in any market, independent of market conditions or economic or political instability.

At Money Watch Africa, we focus on investment opportunities in Africa, and this includes emerging and frontier markets as well as countries not yet classified by MSCI, S&P or FTSE. MSCI frontier markets include Kenya, Mauritius, Morocco, Nigeria, Tunisia and a portion of the West African Economic and Monetary Union (WAEMU). The WAEMU countries classified by MSCI include Benin, Burkina Faso, Cote d’Ivoire and Senegal.

There are also two MSCI emerging markets in Africa – Egypt and South Africa. MSCI also has given standalone status to Botswana and Zimbabwe. Standalone countries often are poised to move up to frontier status. In some cases, a country can be placed in standalone status due to specific turbulent events, which is the case with Ukraine, which was given standalone status after the country was invaded by Russia.

How To Minimize Your Risk

While there might be more risk involved with frontier market investing, there also can be substantial rewards. To minimize your risk, consider the following:

1. Diversify Your Investments

As the saying goes, never put all of your eggs in one basket. A solid portfolio is diversified with a variety of holdings, this might include everything from real estate investment trusts (REITs), mutual funds and ETFs, commodities, bonds and CDs.

With frontier markets and emerging markets, opting for mutual funds and ETFs can be an easy and diversified way to get started investing in Africa. Mutual funds and ETFs are diversified with multiple holdings, which can minimize the risk.

Additionally, it’s much easier to purchase shares in a South Africa ETF or perhaps a general Africa ETF or frontier markets ETF than it would be to purchase stock in a specific company in South Africa or another African nation or to purchase real estate. You can purchase (and sell) most ETFs from online brokerage firms in just a matter of minutes.

2. Do Your Research

Whether you plan your investments on your own or use a trusted financial planner or advisor, it’s crucial to research every investment carefully. Research the companies involved and the company management. If there are multiple companies or holdings, research all of them as well as fund managers and the historic performance of the fund.

3. Monitor Regional News

It’s important to monitor geopolitical events in the frontier markets where you are investing. Geopolitical events, such as civil unrest or elections, can make a significant impact on these markets and you may need to adjust your investment strategies accordingly.

Some investors prefer to stick with multinational companies when making investments in frontier markets or emerging markets. These companies often have greater resources and experience navigating the political and economic instability that can occur in these markets.

Of course, with multinational companies, the profits often benefit the companies more than the actual people that live in the region. If part of your investment strategy includes socially responsible investing, you will want to research the companies carefully to ensure that they are truly helping to boost the economy and help these markets evolve into independent and developed markets with a greater level of stability and prosperity.

Advantages Of MSCI Frontier Market Investments

While there is risk associated with frontier market investing, there are also some good reasons to consider investing in these regions. There is, for instance, a high potential for growth in these developing countries.

Frontier markets and emerging markets tend to have young populations and often an expanding middle class which fuels the need for technological growth and infrastructure improvements as well as an increase in demand for consumer goods.

These nations also often are overlooked by investors, which means that the assets may be undervalued. This provides investors with an opportunity to purchase these assets at low prices and, potentially, enjoy high returns as the market expands. Likewise, there tends to be less competition than in developed markets.

In general, MSCI frontier markets can be a good addition to your portfolio, potentially providing you with higher returns than you might see with investments in developed markets. While there is a risk, and you must do your due diligence and research each option carefully, frontier markets and emerging markets in Africa can be good options to consider for portfolio diversification. 

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