“To boldly go where no man has gone before.” While Star Trek’s Captain Kirk may or may not have been a savvy investor, each week, he and his crew left the comfort of their world to explore the new frontier of space through our television sets. As the crew of the futuristic space ship, Enterprise, searched through space they found new and exciting opportunities. Their fictional adventures can be loosely compared to today’s global markets.
Through mid-August 2017, many investors have seen strong performance from international, emerging, and frontier markets leading to the question, “What is the difference?” Differentiating between foreign markets, exploring international, emerging and frontier markets can be a challenge. Captain Kirk would most likely agree that before exploring or investing in these markets, it is important to differentiate between them.
How is the categorization of a country’s economy or market determined? While there are no universally agreed upon guidelines, there are certain criteria which can be applied to make this determination. Helpful factors include:
- Economic Growth
- Economic Security
- Gross Domestic Product (GDP)
- Income Per Capita
- Level of Industrialization
- Standard of Living
- The Human Development Index (HDI)
- Liquidity
- Geo-Political stability
Simply put, for a country to be considered a “developed market”, it must be more economically developed than emerging markets and frontier markets. The Gross Domestic Product (GDP) of a country is a key indicator of development within a country, along with having a liquid investment market. Liquidity implies that an asset can be easily bought or sold without greatly affecting the price. In short, liquidity makes investing in a particular market much easier and safer. Logic dictates that being able to liquidate assets quickly is beneficial, and less risky than a lengthy complicated process.
The identification of emerging and frontier markets as two separate classifications may be the most common error when comparing the two. Both markets are similar in many respects but also have important differences. An emerging market country may have the domestic resources to grow into a developed market country, but may be lacking key criteria. The country may have political challenges, economic roadblocks, currency volatility, or a lack of liquidity in their stock exchange. A variety of other factors may also influence a country’s market classification. “BRIC” is a common acronym associated with emerging markets. The letters of the acronym represent four large and notable emerging markets: Brazil, Russia, India, and China. These four countries have many similarities, especially in terms of the expectations of their bright economic futures. Currently these economies are not considered “developed”, but they show promise moving forward.
They are similar because a frontier market has most of the same challenges as an emerging market. The difference is in the magnitude and severity of those challenges. Although frontier markets may have the natural resources, the manpower, and the capital to contribute to the global economy, if the cards are stacked against them due to political unrest, geography, or governmental regulations, it may be difficult for that economy to mature. Examples of frontier markets include Nigeria, Kenya, Morocco, and Croatia.
Both emerging markets and frontier markets are less liquid for investors, but may offer higher returns because their economy has room to grow and has potential to expand more rapidly than developed markets. Due to lower liquidity, both emerging markets and frontier markets are riskier; however, with greater risk comes the prospect for greater reward.
Developed markets have advantages in security and stability over emerging markets and frontier markets. They are usually larger and more efficient in terms of liquidity and transparency. In general, developed markets possess the most mature investment markets in terms of regulation and stability. They can be found all over the world, including in the United States, Japan, Australia, and the United Kingdom.
To add to some of the confusion, certain countries may fall in-between two categories depending on who is doing the classification. For example, South Korea is classified as a developed market by the FTSE (European) indices, but is considered an emerging market according to MSCI’s (Global) indices.
Hopping over an ocean or traveling at light speed across the galaxy, a new frontier awaits. Determining the difference between international developed, emerging, and frontier markets can be confusing. With a little exploration of your own, understanding the differences between an emerging market and a frontier market can be helpful for your future investing.
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