Frontier Markets: High Risk, High Reward?

Risk is always in the eye of the beholder.

That’s the message from Jonathan Binder Chief Investment Officer, at Consilium Investment Management , a US firm that specialises in frontier market investments.

From a global allocation perspective, frontier markets are often dismissed as too risky. This fuels a general lack of interest which results in investors missing out on important growth trends and opportunities.

Frontier markets are typically characterised by large, young populations and low labour costs, which provide for significant productivity and output growth opportunities.

“We characterise Frontier Markets using a custom reference index which currently includes the 30 countries illustrated below,” according to HSBC Asset Management . “However, we also consider numerous "off-benchmark" geographies alongside nine countries which we refer to as "crossover countries" – these are emerging markets small enough to be often excluded by emerging market fund managers and sometimes exhibiting Frontier-like characteristics.”

While China has dominated this space for some time, countries like Vietnam offer exciting opportunities backed by strong GDP growth.

“Azerbaijan, Costa Rica, Georgia, Ghana, Honduras and Senegal, among others, recorded some of the strongest annual GDP growth rates in 2Q24, surpassing those of recent quarters,” according to analysts at Fitch Ratings . “In Vietnam, where more up-to-date data are available, the economy expanded 7.4% yoy in 3Q24, its highest annual rate of expansion since 13.7% in 3Q22.”

For the savvy investor, there are ways in. Binder notes that his firm tries to find companies that are benefitting from local growth in the economy for example, financial services (serving large historically unbanked populations), consumer spending (tying into the rising incomes megatrend), and the building/construction sector (to meet growing infrastructure needs).

“Nine times out of 10, people misunderstand or misperceive the risk,” Binder says. “And sometimes they think there’s a risk where there isn’t, and sometimes there’s a risk that they don’t see. And to a certain degree, that is our opportunity.”