Stake Your Claim in the ‘Frontier Markets’

You don’t have to travel far from home to find plenty of risk. But you can if you want. For instance, we read this headline in Bloomberg, “Vietnam, Zambia, Overtake BRIC Stocks as ‘Frontier Markets’ Soar.” BRIC stocks would be Brazil, Russia, India, and China. You know, the places where people used to invest risk capital and receive an outsize reward for it.

With so much money chasing equity returns, even the BRICs have gone soft. Investors now have to go even further abroad to find mis-priced assets or political risk. Hence the 35% gain the S&P/IFCG Frontier Markets Composite Index in the last twelve months. That compares with a twenty eight per cent return on the Morgan Stanley Capital International (MSCI) BRIC index and a downright prudish twelve percent on the S&P 500.

We don’t know much about Frontier markets. However, being originally from Colorado, we know something of the nature of frontiers. You are on the edge of anarchy in such places. There is usually no strong central government or authority to protect you from outlaws, injustice, or mountain lions and brown bears. You own a gun to protect and defend yourself in the absence of an organised police force.

In exchange for the increased risk that you might end up with a knife between your shoulder blades, the profits are (or were) all yours. Seems lawless. Perhaps it is lawless. But those are the risks you take.

We’re not saying frontier markets are lawless, too, although the law in frontier markets is probably not as transparent as it is in more developed markets. And maybe that’s not even a bad thing. But the law and the political order itself are anything but predictable in these markets, which is what makes doing business in them-or investing in businesses that do business in them-so risky. Just what frontiers are we talking about?

According to S&P there are twenty countries represented in the Frontier Markets index. The constituent companies aren’t listed. And the following does not imply and endorsement to pack up your bags and fly to these places to do some equity research. But according S&P, you can find the frontiers of global financial risk in the following places: Bangladesh, Botswana, Bulgaria, Cote d’Ivoire, Croatia, Czech Republic, Ecuador, Estonia, Ghana, Jamaica, Kenya, Latvia, Lebanon, Lithuania, Mauritius, Namibia, Romania, Slovenia, Trinidad and Tobago, Tunisia, and Ukraine.

Of course, you can buy and sell stocks in any of these places, so it may not be exactly like walking in the saloon in the original Star Wars. But some of them are certainly off the beaten investment path. Our guess is that’s where you’ll have to go to get the big returns this year. And for most people, it will be too far. Still, you have to wonder where your risk is greater, the Czech share market or right here in Australia, where everyone buys the same stocks and counts on the same resource boom lasting forever. Hmmmmm.

Dan Denning
Markets and Money

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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I’m interested in investing in frontier markets. Is there some ETF or mutual fund in Australia that gives me access?

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