View source for Frontier market

{{Short description|Term for developing country's market economy}}

A '''frontier market''' is a term for a type of [[developing country]]'s market economy which is more developed than a [[least developing countries | least developed country]]'s, but too small, risky, or illiquid to be generally classified as an [[emerging market]] economy. The term is an economic term which was coined by [[International Finance Corporation]]’s Farida Khambata in 1992. The term is commonly used<ref>{{Cite web|url=https://www.doughroller.net/investing/how-to-start-investing/|title=How to Start Investing: A Complete Guide for Beginners - Doughroller|first=Chris|last=Muller|date=March 24, 2023|website=www.doughroller.net}}</ref> to describe the equity markets of the smaller and less accessible, but still "investable" countries of the developing world. The frontier, or pre-emerging equity markets are typically pursued by investors seeking high, long-run return potential as well as low correlations with other markets.<ref>{{cite news|last=Salamat|first=Rishaad|title=Investing in Cambodia, Haiti, Bangladesh, Laos|url=https://www.bloomberg.com/video/78312296/|accessdate=21 May 2012|newspaper=Bloomberg}}</ref> Some frontier market countries were emerging markets in the past, but have regressed to frontier status.<ref>{{Cite news|url=https://www.marketwatch.com/story/msci-downgrade-argentina-frontier-market-new-york|title=MSCI will downgrade Argentina to frontier market|first=Polya Lesova|last=MarketWatch|website=MarketWatch}}</ref><ref>{{cite news|url=https://www.reuters.com/article/us-msci-equity-reclassifications-idUSBRE9A61FQ20131107|title=MSCI reclassifies stocks in emerging, frontier market indexes &#124; Reuters|date=7 November 2013|work=Reuters}}</ref>

==Terminology==
The term began use when the IFC Emerging Markets Database (EMDB), led by Farida Khambata, began publishing data on smaller markets in 1992.<ref>{{cite web |title=IFC History - Decade 4 |url=https://www.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/about+ifc_new/ifc+history/1990s |website=IFC |access-date=12 February 2021}}</ref>  Khambata coined the term “Frontier Markets” for this set of indices.  Standard and Poor's bought EMDB from IFC in 1999 and in October 2007, S&P launched the first investable index, the [[Select Frontier Index]] (30 of the largest companies from 11 countries) and the [[Extended Frontier Index]] (150 companies from 27 countries).<ref>{{cite web |title=S&P launches first investable index for frontier equity markets |url=https://www.investmentexecutive.com/news/research-and-markets/sp-launches-first-investable-index-for-frontier-equity-markets/ |website=Investment Executive |date=22 October 2007 |access-date=12 February 2021}}</ref> Subsequently, [[MSCI]] began a rival frontier market index,<ref name="MSCI2007">{{cite press release|url=http://www.mscibarra.com/products/indices/fm/MSCI_Frontier_Markets.pdf|publisher=[[Morgan Stanley Capital International|MSCI Barra]]|date=2007-12-18|title=MSCI Frontier Markets Indices}}</ref> and in early 2008, [[Deutsche Bank]] launched the first frontier market [[exchange-traded fund]], on the [[London Stock Exchange]].<ref name="IndexUniverse2008">{{cite web|url=http://www.indexuniverse.com/sections/breaking-news/10/3708.html|publisher=Index Universe|last=Coleman|first=Murray|title=First Frontiers ETFs Open Overseas|date=2008-02-14|access-date=2014-06-17|archive-url=https://web.archive.org/web/20080724113020/http://www.indexuniverse.com/sections/breaking-news/10/3708.html|archive-date=2008-07-24|url-status=dead}}</ref>
Frontier markets are a sub-set of emerging markets, which have [[market capitalization | market capitalizations]] that are small and/or low annual turnover and/or market restrictions unsuitable for inclusion in the larger EM indexes but nonetheless "demonstrate a relative openness to and accessibility for foreign investors" and are not under "extreme economic and political instability."<ref name="MSCI2007" />

Members could be considered to fall roughly into three groups:
* Small countries of relatively high development level (such as [[Estonia]]) that are too small to be considered emerging markets, 
* Countries with investment restrictions that have begun to loosen as of the mid 2000s (such as the countries of the [[Gulf Cooperation Council]]) 
* Countries at a lower development level than the existing "mainstream" emerging markets (such as [[Kenya]] or [[Vietnam]]).<ref name="Investing in Vietnam: The Ultimate Guide">{{cite web|url=http://www.investasian.com/countries/investing-in-vietnam/|publisher= InvestAsian|last=Kirchenbauer|first=Reid|title= Investing in Vietnam: The Ultimate Guide|date=2017-03-25}}</ref>

The term ''pre-emerging markets'' is sometimes used as a synonym for "frontier markets", emphasizing the expectation that they will eventually "graduate" to "emerging market" status.<ref name="What are emerging markets?">{{cite web|url=https://wealth.barclays.com/ocp/en_gb/investment-ideas-and-strategies/home/trends/understanding-emerging-markets/what-are-emerging-markets.html|publisher= Barclays|title= What are emerging markets?|date=2017-04-11}}</ref>

A 2021 analysis proposes the term ''emerged'' to describe markets, economies, or countries that have graduated from emerging market status, but have not yet reached the level equivalent to developed countries.<ref>{{Cite journal|last1=Lee|first1=Eun Su|last2=Liu|first2=Wei|last3=Yang|first3=Jing Yu|date=2021-09-23|title=Neither developed nor emerging: Dual paths for outward FDI and home country innovation in emerged market MNCs|url=https://www.sciencedirect.com/science/article/pii/S0969593121001438|journal=International Business Review|volume=32 |issue=2 |language=en|pages=101925|doi=10.1016/j.ibusrev.2021.101925|s2cid=244268711|issn=0969-5931|url-access=subscription}}</ref>

==Investment case==
Frontier markets have lower market capitalization and liquidity than the more developed, "traditional" emerging markets. The frontier equity markets are typically pursued by investors seeking high, long term returns and low correlations with other markets.<ref>Guerrero, Tomás (March 2013) [https://ssrn.com/abstract=2245075 Frontier Markets: A World of Opportunities]</ref><ref>Guerrero, Tomás (September 2013) [https://ssrn.com/abstract=2333649 Frontier Markets: Old Acquaintances, New Opportunities]</ref><ref>{{cite news|last=Guerrero|first=Tomás|title=Frontier Markets: More profitable, less volatile|url=http://blogs.ft.com/beyond-brics/2014/05/22/guest-post-frontier-markets-more-profitable-less-volatile/|newspaper=Financial Times|date=May 2014}}</ref>

The implication of a country being labeled as ''Frontier'' is that, over time, the market will become more liquid and exhibit similar risk and return characteristics as the larger, more liquid emerging markets.

According to frontier market investors, frontier assets would actually diversify and reduce risk, which contradicts the general notion that risk would be added by including those markets.<ref>According to Marek Ondraschek, Founder of Zurich-based ALNUA Investment Managers and former CEO & CIO of Swiss Life Asset [http://www.opalesque.tv/youtube/Marek_Ondraschek/1 in a video interview.]</ref>

Those who have a focus on frontier markets have different views on what the future holds for the inter-correlation of countries within the asset class. While they share some economics characteristics such as young, increasing educated populations, the individual economies face different internal and external forces. Funds invest to find returns in countries that have increasing trends in domestic consumption but see the overall growth drivers for each country as being different.<ref>{{Cite web|url=http://video.cnbc.com/gallery/?play=1&video=3000192230|title=Tapping into frontier markets amid outflows|date=20 August 2013}}</ref><ref>{{cite journal | doi=10.1016/j.jfineco.2011.02.009 | volume=101 | title=International diversification with frontier markets | journal=Journal of Financial Economics | pages=227–242| year=2011 | last1=Berger | first1=Dave | last2=Pukthuanthong | first2=Kuntara | last3=Jimmy Yang | first3=J. }}</ref> This investment thesis holds water as it is unlikely that a manufacturing based economy, such as [[Bangladesh]], would respond in the same way to external shocks as an island nation where a large proportion of the economy is linked to tourism, such as [[Sri Lanka]].

There are also other non managed ways to gain exposure to these markets that are more generic such as investing in frontier market indices such as MSCI Frontier Index that only invest in large liquid stocks. 

== Frontier markets list ==
A number of organisations place countries into their Frontier market indices.
{| class="sortable wikitable"
|-
! width="20%" | Country
! width="20%" | FTSE<ref>{{cite web |title=FTSE classification of equity markets September 2018 |url=https://www.ftse.com/products/downloads/Matrix-of-Markets_latest.pdf |publisher=FTSE Russell |accessdate=30 October 2018}}</ref>
! width="20%" | MSCI<ref>{{cite web |title=Market cap indexes - MSCI |url=https://www.msci.com/market-cap-weighted-indexes |accessdate=31 October 2018}}</ref>
! width="20%" | S&P<ref name="spindices.com">{{cite web|url=https://www.spice-indices.com/idpfiles/spice-assets/resources/public/documents/725551_spdji2018countryclassificationconsultation6.13.18.pdf|title=S&P Dow Jones Indices' 2018 Country Classification Consultation|date=13 June 2018|website=S&P Dow Jones Indices|publisher=spice-indices.com|archive-url=https://web.archive.org/web/20190309181835/https://www.spice-indices.com/idpfiles/spice-assets/resources/public/documents/725551_spdji2018countryclassificationconsultation6.13.18.pdf|archive-date=9 March 2019|url-status=|accessdate=9 March 2019}}</ref>
! width="20%" | Russell<ref>{{cite web |title=Global Guidebook: Country Classifications |url=https://russellinvestments.com/-/media/files/us/insights/corporate/global-guidebook-2015.pdf |publisher=Russell Indexes |date=March 2015 |accessdate=30 October 2018 |archive-date=19 February 2018 |archive-url=https://web.archive.org/web/20180219090435/https://russellinvestments.com/-/media/files/us/insights/corporate/global-guidebook-2015.pdf |url-status=dead }}</ref>
|-
| {{flag|Argentina}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Bahrain}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Bangladesh}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Benin}}
| {{n/a|not rated}}
| {{yes|Frontier{{efn|name=WAEMU|Included in MSCI frontier markets category as part of the [[West African Economic and Monetary Union]]}}}}
| {{n/a|not rated}}
| {{n/a|not rated}}
|-
| {{flag|Bosnia and Herzegovina}}
| {{n/a|not rated}}
| {{yes|Frontier}}
| {{n/a|not rated}}
| {{yes|Frontier}}
|-
| {{flag|Botswana}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Bulgaria}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Burkina Faso}}
| {{n/a|not rated}}
| {{yes|Frontier{{efn|name=WAEMU}}}}
| {{n/a|not rated}}
| {{n/a|not rated}}
|- 
| {{sort|Cote d'Ivoire|{{flag|Côte d'Ivoire}}}}
| {{yes|Frontier}}
| {{yes|Frontier{{efn|name=WAEMU}}}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Croatia}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|- 
| {{flag|Cyprus}}
| {{yes|Frontier}}
| {{n/a|not rated}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Ecuador}}
| {{n/a|not rated}}
| {{n/a|not rated}}
| {{yes|Frontier}}
| {{n/a|not rated}}
|-
| {{flag|Estonia}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Egypt}}
| {{no|Secondary emerging}}
| {{no|Emerging}}
| {{no|Emerging}}
| {{yes|Frontier}}
|-
| {{flag|Gabon}}
| {{n/a|not rated}}
| {{n/a|not rated}}
| {{n/a|not rated}}
| {{yes|Frontier}}
|-
| {{flag|Ghana}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Guinea-Bissau}}
| {{n/a|not rated}}
| {{yes|Frontier{{efn|name=WAEMU}}}}
| {{n/a|not rated}}
| {{n/a|not rated}}
|-
| {{flag|Jamaica}}
| {{n/a|not rated}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Jordan}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Kazakhstan}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Kenya}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|- 
| {{flag|Kuwait}}
| {{no|Secondary emerging}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|- 
| {{flag|Latvia}}
| {{yes|Frontier}}
| {{n/a|not rated}}
| {{yes|Frontier}}
| {{no|Emerging}}
|-
| {{flag|Lebanon}}
| {{n/a|not rated}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{n/a|not rated}}
|-
| {{flag|Lithuania}} 
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Mali}}
| {{n/a|not rated}}
| {{yes|Frontier{{efn|name=WAEMU}}}}
| {{n/a|not rated}}
| {{n/a|not rated}}
|- 
| {{flag|Malta}}
| {{yes|Frontier}}
| {{n/a|not rated}}
| {{n/a|not rated}}
| {{yes|Frontier}}
|-
| {{flag|Mauritius}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|- 
| {{flag|Morocco}} 
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{no|Emerging}}
|-
| {{flag|Namibia}}
| {{n/a|not rated}}
| {{n/a|not rated}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Niger}}
| {{n/a|not rated}}
| {{yes|Frontier{{efn|name=WAEMU}}}}
| {{n/a|not rated}}
| {{n/a|not rated}}
|-
| {{flag|Nigeria}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|North Macedonia}}
| {{yes|Frontier}}
| {{n/a|not rated}}
| {{n/a|not rated}}
| {{n/a|not rated}}
|- 
| {{flag|Oman}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|- 
| {{flag|Pakistan}}
| {{no|Secondary emerging}}
| {{Yes|Frontier}}
| {{Yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Panama}}
| {{n/a|not rated}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{n/a|not rated}}
|-
| {{flag|Papua New Guinea}}
| {{n/a|not rated}}
| {{n/a|not rated}}
| {{n/a|not rated}}
| {{yes|Frontier}}
|-
| {{flag|Qatar}}
| {{no|Secondary emerging}}
| {{no|Emerging}}
| {{no|Emerging}}
| {{yes|Frontier}}
|-
| {{flag|Romania}}
| {{no|Secondary emerging}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Senegal}}
| {{n/a|not rated}}
| {{yes|Frontier{{efn|name=WAEMU}}}}
| {{n/a|not rated}}
| {{yes|Frontier}}
|-
| {{flag|Serbia}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{n/a|not rated}}
| {{yes|Frontier}}
|-
| {{flag|Slovakia}}
| {{yes|Frontier}}
| {{n/a|not rated}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Slovenia}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Sri Lanka}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Tanzania}}
| {{n/a|not rated}}
| {{n/a|not rated}}
| {{n/a|not rated}}
| {{yes|Frontier}}
|-
| {{flag|Togo}}
| {{n/a|not rated}}
| {{yes|Frontier{{efn|name=WAEMU}}}}
| {{n/a|not rated}}
| {{n/a|not rated}}
|-
| {{flag|Trinidad and Tobago}}
| {{n/a|not rated}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Tunisia}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Ukraine}}
| {{n/a|not rated}}
| {{yes|Frontier}}
| {{n/a|not rated}}
| {{yes|Frontier}}
|-
| {{flag|Vietnam}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
| {{flag|Zambia}}
| {{n/a|not rated}}
| {{n/a|not rated}}
| {{yes|Frontier}}
| {{yes|Frontier}}
|-
|}

{{notelist}}

===Past changes===
[[Colombia]] was promoted to Emerging market by [[Standard & Poors]] effective September 19, 2011.<ref>{{Cite web|url=http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3Dmethodology-sp-frontier.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1244139326604&blobheadervalue3=UTF-8|title = Home &#124; S&P Global Ratings}}</ref> There have been a number of other changes and updates over the years.

==See also==
* [[Developed market]]
* [[Stock exchanges of small economies]]

==References==
{{Reflist}}

[[Category:Business terms]]
[[Category:Economic country classifications]]
[[Category:Development economics]]
[[Category:International development]]
[[Category:Investment]]