Frontier Market Investing: Beyond Emerging Markets to Vietnam, Kenya and Beyond

Frontier markets occupy the tier below emerging markets in the standard classification hierarchy: economies with functioning stock exchanges, some international investor access, but significant constraints in terms of market size, liquidity, regulatory transparency and infrastructure. For investors who have already established emerging market exposure and are seeking further diversification into earlier-stage growth stories, frontier markets deserve serious consideration — accompanied by equally serious caution about the risks.

Capital is at risk. Frontier market investments carry elevated liquidity, political, currency and custody risks. This guide is for information only and does not constitute regulated investment advice.

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MSCI Frontier Market Classification

MSCI classifies markets across three tiers: Developed, Emerging and Frontier. The classification criteria cover:

• Economic development (measured by GNI per capita relative to World Bank thresholds)
• Size and liquidity (minimum market capitalisation and annual trading value for index-eligible securities)
• Market accessibility (foreign investor registration, capital flow restrictions, regulatory environment, custodian infrastructure)

The MSCI Frontier Markets Index currently includes markets across Africa, Eastern Europe, the Middle East, South and Southeast Asia. Classification is reviewed annually and markets can be promoted or demoted.

Promotion pathway. Frontier markets can be promoted to Emerging Market status as their economies develop. Vietnam has been on the MSCI "Watch List" for EM upgrade for several years; Kuwait was promoted from Frontier to Emerging in 2020; Qatar and UAE were promoted in 2014. Promotion typically triggers significant inflows from passive EM funds, which can provide a return catalyst for investors who enter at the Frontier stage.

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Key Frontier Markets

Vietnam is perhaps the most closely watched frontier market. It combines a manufacturing base that has benefited materially from supply chain diversification away from China, a young and growing population, rising consumer spending, and a well-educated workforce. Vietnam's Ho Chi Minh Stock Exchange and Hanoi Stock Exchange together have over 1,500 listed companies. The primary obstacle to MSCI EM promotion has been foreign ownership limits on individual companies (many popular stocks hit their 49% foreign ownership caps, making additional investment impossible for foreign investors) and prefunding requirements for securities purchases. Regulatory reforms are ongoing but progress has been incremental.

Kazakhstan is the largest economy in Central Asia and a significant energy and natural resources exporter. The Astana International Exchange (AIX) is a developing market with ambitions to become a regional financial hub, offering links to the London Stock Exchange. Political risks are real — the January 2022 civil unrest and violent suppression was a reminder that political stability cannot be assumed — but the economy's commodity wealth and regional position make it interesting to specialists.

Kenya is sub-Saharan Africa's largest frontier equity market, with the Nairobi Securities Exchange hosting significant financial services, telecommunications and consumer staples companies. Kenya's mobile banking and fintech ecosystem (M-Pesa) is globally significant. Political risk, currency volatility (the Kenyan shilling has experienced significant devaluation periods) and illiquidity are material constraints.

Nigeria features Africa's largest economy (by GDP) and the Nigerian Stock Exchange, but has faced profound currency challenges — the naira experienced dramatic official devaluations in 2023 — alongside oil price dependency, corporate governance concerns and logistics infrastructure deficits. Specialist Africa managers often have proprietary insights that justify a managed-fund approach rather than passive exposure.

Romania is an unusual frontier case: a European Union member state with growing corporate governance standards but equity markets still classified as Frontier by MSCI (it has not yet met the liquidity and accessibility thresholds for EM, though it has been under consideration for upgrade). Romania's membership of the EU reduces political and legal risk relative to non-EU frontiers.

Bangladesh has one of the fastest-growing garment and manufacturing sectors globally, with the Dhaka Stock Exchange providing access. Currency management, governance transparency and periodic political instability are risks. Bangladesh has navigated major political change in 2024.

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Liquidity Constraints

The most operationally significant difference between frontier and emerging markets is liquidity. Many frontier market stocks trade only thousands of dollars of volume per day; even the larger companies may see daily volume of only a few hundred thousand dollars.

For a fund deploying meaningful institutional capital, this means:

• Entry and exit positions can move the market materially
• Building positions takes weeks or months
• Exit during market stress may be impossible without accepting large discounts
• The bid-offer spread (the difference between buying and selling price) can be 1–3% on many frontier stocks

Investors must accept that frontier market exposure is, in practice, a medium-to-long-term illiquid commitment. Anyone expecting to redeem and liquidate a frontier position in a short time frame may face severe market impact costs.

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Custody Risks

Holding securities in frontier markets requires local custodians whose quality, oversight and stability varies considerably. Risks include:

• Custodian insolvency or operational failure
• Segregation of client assets in jurisdictions with weaker regulatory protections
• Settlement failures and extended settlement cycles (T+3 to T+5 or longer, compared with T+1 in the US and Canada since May 2024 and T+2 in the UK and EU, which move to T+1 in October 2027)
• Foreign ownership restrictions that affect the validity of a holding at or above caps

Institutional investors typically use global custodians (State Street, BNY Mellon, J.P. Morgan) with sub-custodian arrangements locally; the due diligence on sub-custodian quality is an important operational risk consideration.

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iShares Frontier and Select EM ETF

BlackRock's iShares Frontier and Select EM ETF (ticker: FM in the US, also available as a UCITS product) provides passive exposure to the MSCI Frontier and Select Emerging Markets Index. This is the most liquid and accessible single vehicle for frontier market exposure.

Considerations for using this ETF:

• The fund's largest exposures are typically to Kuwait (a large weight historically before its reclassification, now reduced), Vietnam, Morocco, Nigeria and Romania
• High concentration in financial services (frontier markets tend to have large banking sectors as a share of listed equity)
• The UCITS version is domiciled in Ireland and available to European and UK investors
• Daily liquidity is available at the ETF level, though the underlying portfolio is illiquid — significant redemptions could force the fund to sell illiquid positions at unfavourable prices

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Standalone Frontier vs EM Blend Approach

Standalone frontier exposure through a dedicated fund or the iShares FM ETF gives full, targeted exposure. It maximises the diversification benefit relative to mainstream EM but concentrates risk in a narrow, illiquid universe.

Blended EM+Frontier approach — held as a small allocation within a broader emerging market mandate — is a common institutional approach. Some EM managers include frontier positions in "off-benchmark" or "high-conviction" sleeves. This approach trades some specificity for better liquidity management and broader diversification.

For most HNW portfolios, an allocation to frontier markets of 1–5% of total portfolio via a specialist fund or a low-cost ETF is typically sufficient to gain the diversification and growth exposure without creating unmanageable illiquidity.

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Return History and Correlation

Frontier markets have exhibited meaningful periods of outperformance versus developed and emerging markets, particularly during early economic development phases. However, data series are short, methodology is inconsistent across index providers, and survivorship bias (failed or promoted markets drop out of the index) is material.

The correlation of frontier markets to global equities has historically been lower than emerging markets, reflecting less integration into global capital flows. However, during global risk-off episodes, correlations typically rise as indiscriminate selling affects all risk assets.

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Political Risk

Frontier markets by definition carry elevated political risk. Investors should monitor:

• Election cycles and regime stability
• History of expropriation or unfavourable treatment of foreign investors
• Rule of law and property rights enforcement
• Relationship with international financial institutions (IMF, World Bank)
• Currency management — artificial pegs and sudden devaluations are more common

Specialist frontier managers typically conduct political risk analysis as a core part of their process and may hedge currency exposure where practical instruments exist.

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How Global Investments Can Help

Frontier market investing rewards specialist knowledge and long-term commitment. Our investment team can help you assess whether frontier market exposure is appropriate for your risk profile, identify appropriate managed funds with verifiable track records and robust operational processes, and size the allocation to maximise diversification benefit while managing illiquidity risk. We cover key frontier markets in Africa, Asia and Eastern Europe and can provide analysis on specific market opportunities.

Contact us to discuss frontier and emerging market equity exposure.