Frontier Market

What Are Frontier Markets? Definition, Risks, and Opportunities

Key Takeaways

Frontier markets are less advanced capital markets in the developing world but more established than the least developed countries.
Despite their smaller size and higher risk, frontier markets offer potential for high returns, attracting investors seeking diversification.
Investing in frontier markets involves risks like political instability and liquidity issues, yet their low correlation to developed markets can aid diversification.
These markets typically require direct or private investments due to underdeveloped stock exchanges, focusing on startups and infrastructure.

What Are Frontier Markets?

Frontier markets are nascent capital markets found in developing countries that offer unique investment opportunities due to their potential for growth and development. More advanced than the least developed countries but not yet having reached the level of emerging markets, they present both opportunities and risks.

We'll explain their benefits and challenges of investing in them, and practical examples to help you navigate these intriguing spaces in global finance.

The Origins and Characteristics of Frontier Markets

The term “frontier markets” was coined in 1992 by Farida Khambata while she was working at the World Bank; most recently, Khambata cofounded the company Cartica.12

While they are smaller, less accessible, and somewhat riskier than more established markets, frontier markets are still investable. They are considered desirable by investors looking for substantial long-term returns because these markets have the potential to become much more stable and established over the course of decades. However, it is also possible for a more established, emerging market to regress to frontier market status; investing in these markets is still risky.

Investors pursue frontier equity markets to seek potentially high returns. As many frontier markets do not have developed stock markets, investments are often private or direct in startups and infrastructure. Although it’s possible to achieve strong results from investing in frontier markets, investors must also accept higher risks than in the United States or Europe, for example (or any other of the G7 nations).

Some of the risks investors face in frontier markets are political instability, poor liquidity, inadequate regulation, substandard financial reporting, and large currency fluctuations. In addition, many markets are overly dependent on volatile commodities.

Frontier Markets and Lesser Developed Countries

Frontier markets are ahead of lesser developed countries (LDC), although similar risks can apply for investors. The UN currently lists 46 least developed countries that face significant structural challenges to sustainable growth. This includes being extremely vulnerable to economic and environmental shocks. This leads LDCs to be able to access specific international support measures and financial aid that are not available to more developed nations.3

The CDP Secretariat of DPAD/DESA regularly reviews the status of LDCs to determine if and when they will graduate from the category. For example, in March 2018, the Committee for Development Policy (CDP) announced their recommendation that the nations of Bhutan, Kiribati, São Tomé, and Príncipe and Solomon Islands should graduate from the LDC category. However, as of May 2021, this hasn't been approved.4

Investing in Frontier Markets: Portfolio Management Strategies

Frontier market investments can have a low correlation to developed markets and thus can provide additional diversification to an equity portfolio. In portfolio management investors must balance the strengths, weaknesses, opportunities, and threats of certain choices, making tradeoffs and placing bets among debt, equity, domestic, international, growth, and safer options.5

It’s important to maximize a portfolio’s return, given the investor’s appetite for risk. Adding investments in frontier markets to a portfolio is not always suitable for certain investors. Those looking for stability, safety, and/or steady streams of income might steer clear of high-risk bets in these areas.

However, if you do have the appetite and ability for risk (i.e., you can withstand losses in your portfolio), allocating a small portion of your assets to frontier markets could prove fruitful and add a new challenge.5

Financial News. "Frontier Market Pioneer Delivers Bubble Warning." Accessed May 14, 2021.

Cartica. "About Us." Accessed May 14, 2021.

United Nations. "Least Developed Countries (LDCs)." Accessed May 14, 2021.

UNCTAD. "Making Progress on Sustainable Development, Four Countries Tipped to Graduate From Ranks of Poorest." Accessed May 14, 2021.

ScienceDirect. "International Diversification With Frontier Markets." Accessed May 14, 2021.

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