The practice of an emerging stock market investment is simple: you invest in high-growth economies that are gaining political freedom or newly industrializing and your investment will not only gain the growth benefits, but it will provide diversification benefits of an asset that has a low correlation with the developed stock markets. The only problem is that recently many emerging markets, which have in the past shown low correlation with the developed markets, are now showing an investment correlation that is closer to one than zero, which means that they're not really doing the job they're supposed to in a diversified portfolio.
Enter the frontier markets.
Frontier markets and the ETFs that invest in them are the next stage out from emerging markets -- they are pre-emerging, said Imogen Dillon-Hatcher, who is the managing director for EMEA (Europe, Middle East & Africa) at index provider FTSE Group, as told to Fox Business recently.
Mark Mobius says that many of the same characteristics that have historically made emerging markets both rewarding and fascinating to investors are now becoming very evident in frontier markets. Templeton has created frontier market funds.
Frontier markets have had strong performance in 2008 and have been outperforming both emerging and developed markets despite the recent turmoil in global financial markets. For example, in the year ended June 2008 the Bangladesh, Ivory Coast and Mauritius stock market indices returned about 60 per cent in US dollar terms while the frontier country of Lebanon returned more than 100 per cent. Other examples are the markets in Tunisia, Trinidad & Tobago, Kenya and Slovakia, all of which returned about 30 per cent. In comparison, the MSCI World index fell 10 per cent in US terms.