Remember the heady days of just a couple of years ago, when China's economy was growing at near double-digit rates? No longer. The BRICS are still growing, of course, but their wild teenage years are coming to an end. And as these markets have begun to cool, investors are venturing even farther afield. The new buzz is about "frontier markets," a motley collection of dynamic countries -- from Persian Gulf petrostates to mineral-rich African countries -- that promise rapid growth and low correlation to developed (and troubled) markets like the eurozone. But politics in these countries often matter as much as economics. Corruption, political instability, and weak-to-nonexistent regulatory infrastructure are common on the investment frontier. Then again, so are the jaw-dropping returns that have made these markets hot. In other words, these are the markets that have the potential to boom when everyone else is going bust -- even if they can blow up at a moment's notice.
The International Finance Corp. (IFC), the World Bank's private-sector investment arm, announces it will begin publishing data on 14 "frontier markets" -- a term coined by Farida Khambata, head of IFC's capital-markets department -- as part of its Emerging Markets Database (EMDB). Like the buzzing "emerging markets" of the 1980s, these frontiers are just beginning to open up to foreign investors, but they generally exhibit lower liquidity, smaller market capitalization, and unreliable trading infrastructure. The inclusion of these markets -- such as Bangladesh, Botswana, Ghana, Ivory Coast, and Kenya -- in the EMDB is intended to facilitate the inflow of foreign portfolio investment by signaling credibility to investors. It works.
The IFC Frontier Index (which is acquired by financial-services company Standard & Poor's -- S&P -- in 2000) returns an average of 8.4 percent annually, far better than S&P's emerging-market index, which posts an average of 2.6 percent. The index includes the original 14 frontier countries plus a number of later additions.
The frontier takes off, with average annual GDP growth of just over 7 percent among the 25 countries that will eventually be classified as frontier markets by both S&P and Morgan Stanley. The rise is powered by and empowering the global middle class, which is adding 70 million people a year, according to Goldman Sachs.
S&P rolls out its Select Frontier Index, the first investable index targeting a broad array of frontier equity markets. The index originally includes 30 companies -- primarily banks, real estate, and oil firms -- in Bulgaria, Cambodia, Colombia, Jordan, Kazakhstan, Pakistan, Panama, the United Arab Emirates, and Vietnam, and it has a market capitalization of $47 billion, just under the market capitalization for all emerging markets combined in 1980.
With the global credit market beginning to slump, investors turn to frontier markets, which the Wall Street Journal reports are "set to become next year's darlings" for investors. In 2007, Morgan Stanley's frontier index gains a whopping 42 percent.