Saturday, July 20, 2024

Are Frontier Markets an investment opportunity?

Investment opportunities are plentiful these days but with more choice comes more risks. Frontier markets are sometimes overlooked by investors because of the perceived smaller rewards and potential added challenges. But while opting for simple investments in developed countries might seem like the best option, you shouldn’t ignore these smaller markets.

To fully understand why these investments can be so valuable, we need to look at what they are in more detail and compare them to other market categories. So, before we examine the benefits, let’s look at what they are.

What Are Frontier Markets? 

Frontier markets can seem unappealing at first glance. They typically display a number of challenges and risks that more established markets don’t and are essentially the lowest of the three market categories. Developed markets are the leading world powers like the USA and UK. While countries like China are labelled as emerging markets.

But countries in places like Africa and the Middle East are often categorised as frontier markets. A country’s wealth or social development isn’t the sole factor in its market categorisation either. The type of market is decided by things like the capital flow and the opportunities for foreign investments and ownership.

To break things down to the simplest terms, these markets are small scale. Now while the term “small scale” may seem unappealing to many investors, the combined value of all the current frontier markets is still estimated to be around 510 billion dollars.

So, being a frontier market investment manager presents an opportunity to capitalise on these often overlooked markets. However, like always, there are risks involved with investments and numerous factors to consider. But many people make the mistake of ignoring these markets outright because they don’t see them as appealing as their more developed counterparts.

But these frontier market investments can be valuable, and there are numerous reasons investors should consider them. They share some similarities to emerging markets but have their own unique benefits many potential investors don’t know about. Let’s take a look at some of them in more detail.

Reasons For Investing In Frontier Markets  

These markets do have some unique benefits that you won’t find with the more developed markets. So, let’s look at some reasons to why they could be considered for investment.

Global Events 

Global events can have a huge impact on investments, especially in emerging markets, but because these markets are smaller, even huge global events can have a negligible impact. This goes to show that opting for a smaller market can have some big benefits, especially when it comes to unpredictable events.

Expected Growth 

One of the best things that can happen for an investor is to see growth in their investment. One of the good things about these smaller markets is that many are expecting or even experiencing growth right now. Many economists have predicted that Africa will see huge growth in the next few years, making it a very appealing region to invest in.

More Investment Opportunities  

To say these markets are easier to invest in isn’t true. Quite the opposite. There are numerous factors involved with investing in these countries and a number of hoops to jump through to get capital into the market. Every country is different after all and many of these markets have significant challenges to overseas investment. So, while frontier markets aren’t strictly easier to invest in there are greater number of opportunities to invest in them today, then there was even 5 years ago.

Over the last few years there has been a noticeable increase in opportunities for investors including exchange-traded funds (ETFs). Some, EFTs even focus solely on these markets too.

Fewer Links To Other Markets 

Many emerging markets are heavily linked to developed markets. When these leading markets suffer issues, they often have a large knock-on effect on the smaller (by comparison) emerging markets. But because these smaller markets have fewer links to emerging (and developed) markets, they are able to avoid potential knockbacks.

So, that is a small snapshot of some of the unique attributes of investing in frontier markets. Now, this doesn’t mean there aren’t any potential risks. Investing always comes with risks, and these smaller market investments aren’t immune to this. In fact, many an investor would view them as potentially riskier.

However, they are often ignored by investors or simply viewed as not being as appealing. But they can offer some unique opportunities, which if approached with caution can be capitalised upon.

How To Invest In Frontier Markets 

So, have you been tempted to make some investments? Then you might be wondering how you do it, right? While it’s true that some frontier markets countries don’t have traditional stock exchanges, this isn’t always the case.

But the best way to make investments is with specialist help. A specialist investment manager can help you navigate the risks and make smart investments. These markets have some great benefits and are quite unique when compared to emerging and developed markets.

However, this is a double-edged sword in some respects because there are also unique risks to be aware of. Now, while risks aren’t anything new to investors these markets can be more volatile. Again, this will all depend on the country, but some possible risks include things like unpredictable governments and business compliance.

So, to properly capitalise on these opportunities and make smart investments, you should seek professional guidance and assistance with the help of a specialist investment manager – with the knowledge that your investment could go down and up. While you can make investments on your own, it’s always better to call on the aid of an experienced professional, especially when it comes to the more unusual and lesser-known markets.

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