Investing in Frontier Markets: Opportunity, Risk and Role in an Investment Portfolio

CHAPTER 1

Introducing Emerging and Frontier Markets

Over the last decade, returns from developed markets have been effectively zero or negative. In the 10 years ending on December 31, 2012, the Morgan Stanley Capital International Developed World Index returned 5.4 percent annually in U.S. dollars in nominal terms. This extremely disappointing record has been accompanied by enormous volatility, giving investors the worst of both worlds—not only have they effectively not made any money in real terms, but they have experienced moves in the markets that have not been seen since the Great Depression of the 1930s.

Over the same period, emerging markets—defined as those countries with a Gross Domestic Product (GDP) per capita of less than US$12,476 (2012) and which are represented by the MSCI Emerging Markets (Free) Index—have delivered 13.7 percent annually in U.S. dollars, more than doubling an investor's initial investment. There are several reasons for this massive outperformance of more-developed markets by less-developed markets, the most important of which were the low and attractive valuations of the developing as opposed to developed markets at the beginning of the decade. Reasons also include their faster rate of GDP growth, younger populations, higher levels of savings and lower levels of government and personal debt. The growth and success of emerging markets will likely be repeated by the next generation of emerging economies—the frontier markets.

This book examines the ...