Are Frontier Markets Broken as an Asset Class? Investor Insight
Frontier Markets

Higher market cap, but lower portfolio exposure

According to MSCI, emerging markets form 10% of the world equity market capitalization. However, according to Stephen H. Dover, ‎Chief Investment Officer: Templeton Emerging Markets and Franklin Local Asset Management at ‎Franklin Templeton Investments, stocks from these countries form less than a tenth of portfolios of investors interviewed by them.

He also noted that “the 10% figure represents the traditional MSCI indexes – other measures of emerging-market capitalization show emerging markets more broadly represent an even higher percentage.”

Comfortable at home

Interaction with investors have made the Templeton Emerging Markets Group understand that investing in stocks from their home country, or “home-country bias,” is quite evident. Investors find investing in their home country more comfortable and secure even at the cost of higher returns in equities beyond their borders.

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View of the Templeton Emerging Markets Group

The Templeton Emerging Markets Group considers emerging markets to be crucial to the global economy. Dover informs that emerging market countries form half of the world GDP (gross domestic product). This number goes up to nearly 60% when using purchasing-power parity. Further, these countries are responsible for 80% of global GDP growth.

Due to this view, the Group believes that the home-country bias is stopping investors from “a great potential opportunity for diversification.” They believe that emerging markets yet have room to grow.

Dover thinks that apart from emerging markets, there are a plethora of opportunities in frontier markets which investors are not even considering. In fact, equities from some of these countries do not even make it to global indices. He states that “These markets represent a smaller subset of emerging markets that are even less developed and include most countries on the African continent.”

Frontier markets go beyond the 23 countries classified as emerging markets. The MSCI frontier Markets Index comprises of stocks from 30 countries like Argentina, Croatia, Kenya, Nigeria, Bahrain, Bangladesh, Vietnam, apart from the eight countries of The West African Economic and Monetary Union (or WAEMU).

Popular ETFs investing in frontier markets are the iShares MSCI Frontier 100 ETF (FM), the Guggenheim Frontier Markets Equity ETF (FRN), and the Global X Next Emerging & Frontier ETF (EMFM).

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