What Are Frontier Markets? Defining the Next Tier of Global Investing
This guide will break down what frontier markets are, their characteristics, the countries they include, their benefits and challenges, and why 2025 could be a pivotal year for investing in them.
1. Understanding Frontier Markets
Frontier markets are economies that are less developed than emerging markets but more advanced than the least developed countries. Think of them as the junior league of global investing, not yet ready to be called emerging markets, but already showing promise.
The term was popularized by MSCI (Morgan Stanley Capital International) and other index providers to classify countries that don’t meet the criteria for emerging status, often due to smaller market capitalization, lower liquidity, or stricter foreign investment restrictions.
Key Characteristics of Frontier Markets
- Low Market Liquidity: Fewer shares traded daily compared to developed and emerging economies.
- Smaller Market Size: Limited number of listed companies and sectors.
- Developing Infrastructure: Financial, legal, and technological systems are still maturing.
- Higher Volatility: Prone to price swings due to smaller investor bases.
- Regulatory Restrictions: Foreign ownership limits or capital controls may apply.
2. Frontier vs Emerging Markets: The Main Differences
While both categories represent developing economies, the distinction between frontier markets and emerging markets lies in size, maturity, and accessibility.
| Criteria | Frontier Markets | Emerging Markets |
| Market Size | Small | Larger |
| Liquidity | Low | Moderate |
| Infrastructure | Developing | More established |
| Investor Access | Often restricted | Relatively open |
| Examples | Vietnam, Nigeria, Bangladesh | Brazil, India, South Africa |
3. Examples of Frontier Markets in 2025
As of 2025, MSCI and FTSE Russell classify the following economies as frontier markets (list may vary depending on provider):
- Vietnam – Rapid manufacturing growth and export diversification.
- Bangladesh – Strong textile industry and rising GDP.
- Kenya – Financial hub of East Africa with growing tech sector.
- Morocco – Expanding renewable energy and manufacturing base.
- Kazakhstan – Rich in oil, gas, and minerals.
- Romania – Tech outsourcing and growing EU integration.
- Sri Lanka – Tourism and apparel exports despite economic challenges.
These markets tend to have niche strengths from natural resources to low-cost manufacturing making them appealing for targeted investment strategies.
4. Why Invest in Frontier Markets?
Investors are drawn to frontier markets for three main reasons: growth potential, diversification, and valuation opportunities.
4.1 High Growth Potential
Frontier economies often grow at faster rates than developed markets due to:
Rising middle class
- Untapped natural resources
- Young and expanding populations
- Early-stage industrialization
For example, Vietnam’s GDP growth in recent years has consistently outpaced that of many developed countries, driven by manufacturing and exports.
4.2 Portfolio Diversification
Frontier markets typically have low correlation with developed and emerging markets, which means:
- Global downturns may affect them differently.
- Political or economic cycles may be independent.
This can help investors balance risk and return.
4.3 Attractive Valuations
Because frontier markets are less followed by analysts, they may be undervalued, creating opportunities for savvy investors to buy early.
5. Risks of Investing in Frontier Markets
While the rewards can be substantial, frontier markets come with distinct risks that investors must manage.
Political Instability – Unpredictable policy changes or government transitions.
Currency Volatility – Weak or unstable currencies can erode returns.
Liquidity Risk – Difficulty buying or selling assets quickly.
Regulatory Barriers – Restrictions on foreign investment.
Data Limitations – Lack of reliable financial reporting.
6. How to Invest in Frontier Markets in 2025
Accessing frontier markets is easier than it was a decade ago thanks to:
Frontier Market ETFs – e.g., iShares MSCI Frontier and Select EM ETF (FM).
Mutual Funds – Managed by professionals specializing in smaller economies.
Direct Equity Investments – Buying stocks listed in frontier exchanges (requires local brokerage access).
Private Equity & Venture Capital – Funding startups and private businesses.
7. MSCI Frontier Market Index
The MSCI Frontier Markets Index tracks the performance of companies in frontier economies, providing:
Benchmarks for investors
Transparency on classification changes
A guide for passive investing
In 2025, MSCI has signaled possible upgrades for certain markets (like Vietnam) to emerging status, which could attract new institutional capital.
8. Trends Shaping Frontier Markets in 2025
Several global shifts are boosting the frontier markets story this year:
Nearshoring & Supply Chain Diversification – Companies are moving manufacturing to Vietnam, Bangladesh, and Morocco to reduce reliance on China.
Digital Transformation – FinTech, e-commerce, and mobile banking adoption is soaring.
Sustainability & ESG Investing – Renewable energy projects in Morocco, Kenya, and Kazakhstan.
Institutional Entry – Pension funds and sovereign wealth funds are adding exposure.
9. Strategies for Frontier Market Investing
Long-Term Horizon – Volatility is common, but growth potential is significant over decades.
Diversification Across Multiple Frontier Economies – Avoid putting all capital in one country.
Blend with Emerging & Developed Market Assets – To balance overall portfolio risk.
Currency Hedging – To protect against foreign exchange losses.
10. The Future of Frontier Markets
Experts predict that several frontier markets will graduate to emerging market status within the next decade. This transition could lead to:
Greater capital inflows
Improved infrastructure
Stronger governance
Investors who position themselves early could benefit from both valuation gains and liquidity improvements.
Experts predict that several frontier markets will graduate to emerging market status within the next decade. This transition could lead to:
Greater capital inflows
Improved infrastructure
Stronger governance
Investors who position themselves early could benefit from both valuation gains and liquidity improvements.
FAQs About Frontier Markets
Frontier markets are economies that are less developed than emerging markets but have the potential for significant economic growth and investment returns.
Index providers like MSCI and FTSE Russell classify them based on market size, liquidity, and investor accessibility.
Yes, they tend to have higher political, currency, and liquidity risks, but they may also offer higher growth potential.
Examples include Vietnam, Bangladesh, Kenya, Morocco, Kazakhstan, and Sri Lanka.
Through ETFs, mutual funds, direct stock purchases, or private equity investments.
