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

Conclusion

In this book, we have described the emerging world of frontier markets and examined the differences between the various regions. We have explained why adding investments from these markets can reduce a portfolio's overall risk despite their high volatility, made investors aware of the importance of understanding their own inherent biases when considering investing in these economies and finished by examining the different methods of gaining access to them.

We have demonstrated our belief that frontier markets are in the same position as the original emerging markets were 15 years ago. Then, after an initial period of strong performance in the early 1990s, emerging markets became overvalued and most experienced severe economic difficulties from 1995 to 1999, when their policy of operating a fixed– or managed–float exchange rate led to banking and foreign exchange crises. Similarly, after strong performance from frontier markets in the five years until the financial crisis of 2008–09, there was a dramatic sell-off, which saw the MSCI Frontier Markets Index fall more than 65 percent.

After the Asian and Russian crises of 1997–98 and the Brazilian real devaluation of 1999, emerging markets sold at cheap valuations with floating exchange rates that had fallen sharply. Over the following decade from December 31, 2000, to December 31, 2010, the MSCI Emerging Markets (Free) Index produced a return of 182 percent in U.S. dollars, equivalent to more than 15 percent per annum. ...