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Why frontier markets are different from emerging markets

Written By | Apr 15, 2014

WASHINGTON, April 15, 2014 — Frontier markets are their own specific subset. They are investable, but have less stable economies than an emerging market. Once labeled a frontier market, it is possible that a country will become an emerging market over time. However, it is not correct to assume that is necessarily the case.

By 2015, seven out of the ten fastest-growing world economies will be in Africa. Moreover, according to a recent report from the World Bank Group (WBG), economic growth in Sub-Saharan Africa rose from 4.7 percent in 2014 to an estimated 5.2 percent in 2014. Contributors to this strong performance included tourism growth, increased investment in infrastructure and natural resources, slowed inflation, and rises in household incomes and spending.

As noted in the WBG report, capital flows to Sub-Saharan Africa also increased, reaching an estimated 5.3 percent of regional GDP last year, markedly above the developing-country average of 3.9 percent. Meanwhile, net foreign direct investment to the region grew by 16 percent as a result of new oil and gas discoveries in Angola, Mozambique, Tanzania, among other countries.

However, WBG’s report also cites an analysis from Africas Pulse that maintains, “[W]hile GDP growth in the region is expected to remain stronger than in many other developing countries worldwide, a number of important risks remain.”

These risks include possible declines in commodity prices, volatile food prices, and social and political unrest. Additionally, when analyzing Africa’s growth and trade patterns, Africas Pulse cautions that, “export diversification remains a tough challenge for many African countries, especially oil producers.”

Granted, it’s easier for a small economy to grow at a faster rate, as is the case with many African nations. Nonetheless, such growth does illustrate that, even given the possible risks, there is potential in Africa. The continent has always had an abundance of natural resources; but some countries have just recently found the means to capitalize on them in an efficient way.

With high-growth potential, it is understandable to see why someone would invest in a frontier market. The sales pitch is that any of these countries could be the next China, India, or even Japan. Investors in frontier markets make a long-term bet that they hope will result in a high return. However, there are major risks involved with investing in a developing country.

That’s enough to give any investor pause. Investing in frontier markets is not for novice investors, and in any case – caveat emptor – let the buyer beware.

When asked by Fortune Magazine about investing, Warren Buffet said, “Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.”

Every country is different, every situation is different, and no two frontier markets are the same. The only thing they have in common is the high amount of risk associated.

Jeff Barrett is an experienced columnist and digital public relations professional. He has been named Business Insider’s #1 Ad Executive on Twitter, a Forbes Top 50 Influencer In Social Media and has contributed to Technorati, Mashable and The Washington Times.