Skip to main content

You are here

Blog Listing Page

Frontier Markets: The new emerging markets?

For many market participants, diversification was always one of the great attractions of emerging markets. In the past, since these markets did not track developed markets they provided a useful counterbalance for the global investor. That is no longer so much the case as emerging and developed markets have shown in recent years an inconvenient and increasing correlation.

Frontier markets, on the other hand, still offer a strong element of diversification.FTSE Frontier Index has a five-year correlation of only 0.5132 to the FTSE All Cap Emerging Index. Frontier markets are one step beyond other emerging markets in the sense that they are at an earlier stage of economic reform and financial market development.  It does not, however, mean that they are necessarily any poorer or less economically developed than many emerging or even some developed market countries. After all, Qatar – with one of the highest levels of per capital wealth in the world – is classified by FTSE as “frontier”.  So also is oil-rich Nigeria. Frontier markets still have a number of improvements to take before before their market structures qualify them for an upgrade to emerging status.

Accurately identifying which countries count as frontier, therefore, is crucial. For most market participants, that can be a tough job without expert help which is why FTSE has just launched a new FTSE Frontier Market Index Series to complement its existing developed and emerging market indices. Using its rules-based and transparent country classification system, FTSE has identified 26 frontier markets. The index series covers 368 companies within this universe. It is, in effect, a road map for index users to understand and access these often distant and lesser known markets.

One interesting characteristic of frontier markets that the new index series illustrates is that, counter-intuitively, these markets are less volatile than their emerging market cousins. In fact, as a group they have historically even exhibited less volatility than developed markets too. At the same time, they demonstrate lower valuations than emerging markets even though they have outperformed them for the last three years.

 Source: FTSE, as at 31 December 2013

 

© 2015 London Stock Exchange Group companies.

London Stock Exchange Group companies includes FTSE International Limited (“FTSE”), Frank Russell Company (“Russell”), MTS Next Limited (“MTS”), and FTSE TMX Global Debt Capital Markets Inc (“FTSE TMX”). All rights reserved.

“FTSE®”, “Russell®”, “MTS®”, “FTSE TMX®” and “FTSE Russell” and other service marks and trademarks related to the FTSE or Russell indexes are trademarks of the London Stock Exchange Group companies and are used by FTSE, MTS, FTSE TMX and Russell under license.

All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by the London Stock Exchange Group companies nor its licensors for any errors or for any loss from use of this publication.

Neither the London Stock Exchange Group companies nor any of their licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Russell Indexes or the fitness or suitability of the FTSE Russell Indexes for any particular purpose to which they might be put.

The London Stock Exchange Group companies do not provide investment advice and nothing in this communication should be taken as constituting financial or investment advice. The London Stock Exchange Group companies make no representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the London Stock Exchange Group companies. Distribution of the London Stock Exchange Group companies’ index values and the use of their indexes to create financial products require a license with FTSE, FTSE TMX, MTS and/or Russell and/or its licensors.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.

 

Blog Listing Page