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

CHAPTER 5

Economic Strengths of Emerging and Frontier Markets

A number of reasons explain the attractiveness for investors of emerging markets and frontier markets, which we describe as developing markets. These reasons include their lack of correlation with developed markets, which means adding developing markets to a traditional portfolio can reduce its overall volatility. Another reason often cited is their faster rate of economic growth compared to developed markets. The question investors must ask, however, is whether their accelerated growth has translated into superior returns compared to developed markets.

RETURNS FROM EMERGING MARKETS

As we noted in Chapter 1, over the last decade, emerging markets, as represented by the MSCI Emerging Markets (Free) Index, have delivered substantially higher returns than developed markets, as represented by the MSCI World Index. This does not necessarily prove, however, that higher economic growth results in higher stock market returns. For the decade ending October 31, 2012, the MSCI Emerging Markets Index delivered annual price-only returns of 13.4 percent p.a. and total returns of 16.1 percent p.a. against returns from the MSCI All Country World Index of 5.6 percent p.a. and 8.3 percent p.a. respectively. This return is more than double that of developed markets. It is largely due to the low valuations of emerging markets at the beginning of the last decade, when they had recently been through the Asian crisis of 1997–98, the Russian ...