The International Finance Corp, which is an investment

The International
Finance Corp, which is an investment department of World Bank, announced in
1996 that it is going to publish data of “frontier markets”, which comprises of
14 nations at that time. The word “frontier markets”, was first coined by Farida
Kham batá who was the head of IFC capital markets department.

Frontier markets are described
as a cartel of low income developing countries which are much similar to
emerging markets, but these markets are in their initial stages of capital
markets & macroeconomic development. Their capital markets generally are not
included in most of the indices of emerging markets and global equity markets.

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According to
the recent IMF 5-year projection, 23 out 26 world’s fastest growing economies
are none other than frontier markets. The frontier markets, are grouped as a collection
of charismatic countries starting from, Persian Gulf petrol nations to African
countries which are abundant in mineral resource, these countries ensure rapid
growth and low amount of co-relation to the well-developed markets like the Europe
zone. The frontier markets segment holds the “big pie”, investment
opportunity for the future, as the equity markets of these nations can go to a
greater breadth and depth.

But, before
considering any investment ideas one must concentrate on the politics of these frontier
countries as they are placed with equal importance with economics of their
respective nations. Major concerning issues like corruption, instability of
political institutions, uncertain regulatory power developed
infrastructure are common issues faced by the investors. At the same time, we
shouldn’t under-value the returns these markets are offering to the early
movers in different segments in their respective states or nations. These
markets can possess a potential deal with potential risk.

At present the
FTSE Frontier Index consists of 21 frontier countries, Russell Frontier Index broadcasts
a set of 39 countries. In total, 44 countries are included in any one of the
frontier indices from MSCI, FTSE, S&P, Russell, and the common point is
that there are 15 countries which appear in all 4 organizations broadcasts.  The MSCI All Country
World Index (ACWI) which is a widely used & accepted global equity
benchmark which contains both developed & emerging markets, have identified
65 nations which belong to the frontier market segment or have the same market
capital data capacity. Which, is a wider opportunity block than other blocks
proposed by different international organizations.First, we will be looking
on how these frontier markets are being divided and on what basis. The below
mentioned parameters are according to the FTSE’s Quality of Markets Matrix. To
any country to be classified as a “frontier”, market the matrix requires:1. An official regulatory
authority for stock market  2. Less restrictions on capital
inflow into the country 3. Low amount of trades
failure4. T+5 or better 5. Periodic reporting
process for trades At present 247 countries,
nations, and city state entities in the world. Out of which nearly 150 have their
own stock exchanges and 26 countries presently classified as “developed” &
22 as “emerging”, by the FTSE’s Global Equity Index Series. The rest 102
“unclassified” countries constitute a large global frontier block, potentially
ready for international investment. FTSE has identified 26 frontier countries,
that constitute for the eligibility of the FTSE Frontier Index. Out of which 3
has been removed as they are now qualified as emerging economies. One thing we can say
without any doubt that, these frontier markets are under-invested, less
researched and less co-related with lessened levels of liquidity. They are also
merely transparent, contain huge inefficiencies, which devise as an excellent opportunity
to the “alpha” generation.                           WHY TO INVEST1.     
Economic Growth – The frontier markets have
been experiencing high growth in terms of both Nominal & Real GDP. The
private investors are highly investing in these type of markets as they want to
diversify the portfolio and also the investment in the emerging markets have
been experiencing a minimal growth rate.  2.     
Favorable demographics – The
high growth of frontier markets is equipped with large and young populations,
when compared to the emerging or developed nations. These nations account to nearly
12% of the global population, this gave rise to a higher ratio of working
population to who will be soon replacing the “boomers 2”. 3.     
Urbanization –  As the world is
developing towards a more robotic time, the workers in frontier markets are
shifting from low wages agricultural jobs to urban manufacturing jobs. The
development of outsourcing and globalization has led to creation of jobs and
increase the role of manufacturing in these frontier nations. These developments
are to be continued as future regulations & taxation within these well-developed
worlds escalate to greater heights. The growth of labor force, and increase of
urbanization provide a base for economic growth