(/en)

Who we are
Who we are (/en/who-we-are)

Investment Management Committee (/en/who-we-are/investment-management-committee)

Client Committee (/en/who-we-are/asset-management-committee)

Stewardship (/en/who-we-are/stewardship)

15 Sponsorship
JUN 2018 DIVERSIFICATION
Sponsorship (/en/who-we-are/our-sponsorship)

The evolution
Golf sponsorships of frontier markets
(/en/who-we-are/our-sponsorship/golf)

Rugby sponsorships (/en/who-we-are/our-sponsorship/rugby)

Ski schools (/en/who-we-are/our-sponsorship/ski-schools)

ABERDEEN STANDARD INVESTMENTS (/EN/INSIGHTS-THINKING-ALOUD/ARTICLES-BY-
Tennis
AUTHOR?AUTHOR=ABERDEEN+STANDARD+INVESTMENTS)
sponsorships (/en/who-we-are/our-sponsorship/tennis)

Contact sponsorship (/en/who-we-are/our-sponsorship/contact-sponsorship)

Bonds (/en/insights-thinking-aloud/articles-by-tag?tag=Bonds)
Cultural Equities (/en/insights-thinking-
sponsorship (/en/who-we-are/our-sponsorship/cultural-sponsorship)

Globalincome
Fixed locations (/en/who-we-are/global-locations)
(/en/insights-thinking-aloud/articles-by-tag?tag=Fixed+income) Economics (/en/

Emerging Markets (/en/insights-thinking-aloud/articles-by-tag?tag=Emerging+Markets) Intere

Debt (/en/insights-thinking-aloud/articles-by-tag?tag=Debt) Currency (/en/insights-thinking-al

Developing (/en/insights-thinking-aloud/articles-by-tag?tag=Developing) Active Management

Governance (/en/insights-thinking-aloud/articles-by-tag?tag=Governance) Risk (/en/insights-t

Diversification (/en/insights-thinking-aloud/articles-by-tag?tag=Diversification)

SHARE VIA

(HTTP://WWW.FACEBOOK.COM/SHARER/SHARER.PHP?
U=HTTPS://WWW.ABERDEENSTANDARD.COM/EN/INSIGHTS-
(HTTP://HTTPS://WWW.ABERDEENSTANDARD.COM/EN/INSIGHTS-
THINKING-ALOUD/ARTICLE-PAGE/THE-EVOLUTION-OF-
THINKING-ALOUD/ARTICLE-PAGE/THE-EVOLUTION-OF-
FRONTIER-MARKETS&TITLE=THE EVOLUTION OF FRONTIER
(HTTPS://WWW.LINKEDIN.COM/SHAREARTICLE?
FRONTIER-MARKETS)
MARKETS)
MINI=TRUE&URL=HTTPS://WWW.ABERDEENSTANDARD.COM/EN/INSIGHTS-
(MAILTO:?SUBJECT=THE EVOLUTION OF FRONTIER
THINKING-ALOUD/ARTICLE-PAGE/THE-EVOLUTION-OF-FRONTIER-
MARKETS&BODY=THE EVOLUTION OF FRONTIER
 What we do

Introduction
What we do (/en/what-we-do)

Alternatives (/en/what-we-do/alternatives)
There has been
Equities a growing interest in frontier-market equities and bonds in recent years.
(/en/what-we-do/equities)
Frontier markets represent the “new” segment of emerging markets where most investors have
Fixedexposure.
limited Income (/en/what-we-do/fixed-income)
By nature, these markets are relatively small and less liquid than mainstream
emerging markets
Real Estate and, at times, can be affected by periods of elevated volatility. Information is
(/en/what-we-do/real-estate)
often sparse when it comes to companies, public sector expenditures and revenues, and
Liquidity
political (/en/what-we-do/liquidity)
risk. However, this “information risk” can provide opportunities for active investors who
are willingMarkets
Private to take a(/en/what-we-do/private-markets)
long-term view. Investment managers who have demonstrated their
capabilities in research and investing in frontier markets, both in equities and fixed income, can
Multi-Asset
provide (/en/what-we-do/multi-asset)
valuable expertise in this specialised segment of the markets.

Wealth (/en/what-we-do/wealth)
Frontier growth outlook remains healthy
Quantitative Investments (/en/what-we-do/quantitative-investments)

Insurance (/en/what-we-do/insurance)
16

14
Stewardship & ESG
12
Stewardship & ESG (/en/what-we-do/stewardship-and-esg)
10

8 Good Money Week (/en/what-we-do/stewardship-and-esg/good-money-week)

6
Insights & Thinking aloud
4
Insights & Thinking aloud (/en/insights-thinking-aloud)
2

0 Thinking aloud (/en/insights-thinking-aloud/thinking-aloud?tag=Thinking+Aloud)

-2
Weekly economic briefing (/en/insights-thinking-aloud/weekly-economic-briefing?
-4
tag=Weekly+economic+briefing)
-6

-8 Global outlook (/en/insights-thinking-aloud/global-outlook?tag=Global+Outlook)

-10
News & media
Mozambique

Ethiopia

Jamaica

Belarus
Mongolia
Uganda
Rwanda

Bangladesh

Senegal
Côte d'Ivoire

Egypt

Georgia

Morocco
Ghana
Sri Lanka

Serbia
Armenia
Cameroon

Gabon

Zambia
Nicaragua

Ukraine
Guatemala

Costa Rica
Honduras

Namibia
Bolivia
Fiji

Argentina
Jordan
Lebanon
Suriname

El Salvador
Belize
Croatia

Nigeria
Iraq
Vietnam
Kenya

Dominican Republic

Republic of Congo
Papua New Guinea
Pakistan

Paraguay
Tanzania

Tunisia

News & media (/en/media-centre)

All news articles (/en/media-centre/press-releases-archive)

2017 2022
Media contacts (/en/media-centre/media-contacts)

Media assets (/en/media-centre/media-assets)

IMF forecasts GDP growth

Source: IMF, WEO, Apr 17

 MSCI FRONTIER
Careers MARKETS INDEX (USD): Sector Weights
Careers (/en/careers)

Early careers 0.42%%

1.08%%
Early careers (/en/careers/early-careers)
2.76%%
3.37%%
4.07%%
Programme
4.38%%
overview (/en/careers/early-careers/programme-overview)

What we offer (/en/careers/early-careers/what-we-offer)

45.92%%
6.16%%

Meet our employees (/en/careers/early-careers/meet-our-employees)

Recruitment process (/en/careers/early-careers/recruitment-process)

MiFID
7.23%%
II (/en/mifid-ii)

Contact
11.16%% us (/en/contact-us)

13.44%%

Financials Telecommunication Services Consumer Staples

Real Estate Energy Materials Industrials

Utilities Health Care Information Technology

Consumer Discretionary

MSCI FRONTIER MARKETS INDEX (USD): Country Weights

 22.08%%

30.59%%

16.64%%
7.3%%

7.92%%
15.46%%

Argentina Kuwait Vietnam Morocco

Nigeria Other

Source: MSCI, March 2018. Past performance is not a guide to future results.

Frontier-market equities

As an asset class, frontier-market equities lie on the periphery of global equities investing,
falling outside of even the emerging markets category. But while they are peripheral from the
point of view of industrial scale and geography, these economies can be vibrant, with thriving
private enterprise and a high level of entrepreneurship. Many frontier markets have
transformed themselves over the past two decades, with progress on several fronts: literacy,
access to credit, a communications revolution, improved public sector accountability and an
entrenchment of democracy. These advances have elevated the sustainable growth rate for
many frontier countries while also helping reduce risks. Local exchange-listed companies are
among the greatest beneficiaries of these developments.

Those who have been in the asset management industry long enough may remember that in
1988, the newly-launched Morgan Stanley Capital International (MSCI) Emerging Markets Index
represented less than 1% of the world’s market capitalisation; today, emerging markets
comprise 13%. We believe frontier markets have the potential to grow just as rapidly, given that
(under the broadest definition) they comprise over 100 countries accounting for over 30% of
the world’s population and almost 10% of global gross domestic product (GDP).

But for the time being, mainstream investors may continue to consider the asset class esoteric
in that it is small in terms of market capitalisation and poses various risks. This is perhaps not a
bad thing, as this is still a small asset class with limited capacity to absorb large flows.

The term “frontier markets” was first introduced by the International Finance Corporation (IFC)
in 1992, referring to a subset of smaller markets within its emerging markets database that had
lower levels of market capitalization and less liquidity. Standard & Poor’s launched the first
frontier index in October 2007, closely followed by the launch of the MSCI Frontier Markets
Index – the most widely used benchmark today – later that same year.

Although frontier markets are mostly associated with lower-income countries with a nascent
level of development yet generally high GDP growth rates, that is not exclusively the case.

Argentina is categorised as a frontier market despite being considered an upper middle-income

country by the World Bank; Kuwait is also in the MSCI Frontier Index, but is ranked the fourth-
richest country in the world in GDP per capita terms. When classifying a country, index
providers look less at a country’s economic standing instead focusing more on its equity capital
market size, liquidity and “openness” to foreign investors.

Taking a look at MSCI’s classification of frontier markets, there are significant concentrations in
terms of countries and sectors, some of which appear quite incongruous. Several highly
populous yet low-income nations are dwarfed by small and wealthy ones, for example, simply
due to the relative size of their equity markets. It becomes clear, in our opinion, that many
frontier markets have little or nothing in common with each other.

Frontier debt

While access to international capital markets has improved in recent years, as illustrated by the
growth of new Eurobond issues, frontier markets remains a small part of the overall emerging
market universe. Issue sizes of up to US$1 billion, along with limited issuance, ensures these
new issues are easily absorbed by the market, however. Such issues are typically associated
with higher yields, as shown in the graph below. And with today’s persistent low-yield
environment, it’s no surprise we’ve seen an increase in appetite from both dedicated and non-
dedicated frontier market investors.
The growth of local currency markets has been hindered by various structural issues, such as a
local institutional investor base that has been unwilling to take duration risk, having
traditionally preferred short-term instruments. But there are exceptions. Nigeria is an example
of a country with a fairly developed pension fund industry and other local investors who have
an appetite for long-dated bonds out to 20 years. Nigeria would be an appealing market for
offshore investors if it was to allow for a market-determined exchange rate rather than trying
to micromanage the currency following the most recent devaluation in mid-2016.

Ghana has made some headway over the past several years in building out a yield curve to ten
years while attracting strong offshore interest in three- to five-year bonds. Offshore investors
are still restricted from purchasing bonds with maturities of up to one year in the primary
market, however. If this restriction were removed, it would inevitably lead to further progress,
although authorities have so far been reluctant to fully liberalise the local market. Some
countries apply withholding taxes on local bonds, and this has discouraged participation by
offshore investors. There are limits on the growth of frontier bond markets, but we believe it
has merits as a standalone asset class given the high yields, diversification benefits and low
correlation to US Treasuries.

Frontier market bond yields are higher than core EM…

 7

4
Yields (%)

0
EM Hard Currency EM Hard Currency EM Local Currency Frontier Mark
Corporate Sovereign Sovereign Sovereign

Source: JP Morgan, 28 Feb 18. Past performance is not a guide to future results.

Low correlation with USTs makes frontiers the holy grail for
investors
Source: JP Morgan, 28 Dec 17. Past performance is not a guide to future results.

Bond markets: growing, gaining traction

From a geographical standpoint, Africa is most associated with frontier markets. As a region, it
meets the criteria of a frontier market, although Sub-Saharan Africa (SSA) is also becoming an
increasing part of overall emerging market portfolios due to the inclusion of more countries in
the main benchmark emerging market bond indices. Over the past decade, going back to
Ghana’s 10-year Eurobond in October 2017, there’s been over $30 billion of Eurobonds from
SSA sovereigns, providing a number of relative value opportunities among the various issuers.
Banks and corporates, primarily from Nigeria, have also been able to tap the Eurobond market.
Elsewhere, countries such as Dominican Republic, El Salvador, Costa Rica, Guatemala, Sri Lanka,
Vietnam, Mongolia, Pakistan, Egypt and Iraq have been a part of the main hard currency index
for many years and therefore are more familiar to emerging market investors compared to
some of the SSA issuers. However, their economic, political and social characteristics place
them in the frontier market category.

Frontier-market bonds are a relatively late comer to the index world. There was no dedicated
bond index until the introduction of the JP Morgan Next Generation Emerging Markets
(NEXGEM) Index in December 2011. The NEXGEM now consists of 32 countries, defined as the
smaller, less liquid emerging-market economies with less developed capital markets. They
represent a small but growing portion of the more established JP Morgan EMBI indices (a well-
established index that tracks total returns for US dollar-denominated debt instruments issued
by emerging market sovereign and quasi-sovereign entities). To be eligible, countries must have
a weight of less than 2% of the JP Morgan EMBI Global Diversified Index for the past 12 months,
be rated Ba1/ BB+ or lower by both Moody’s and S&P,1 and cannot be a member of the
European Union (EU) or be engaged in the process of securing EU membership. There are no
indices for hard currency frontier corporates and local currency bonds.

ESG

The analysis of environmental, social and governance (ESG) risk factors is an integral part of
Aberdeen’s credit risk assessment process. When it comes to assessing sovereign risk, ESG risks
are more focused on social and governance indicators than environmental factors as they
generally have a more direct link to a country’s liquidity and solvency profile. Intuitively,
adequate social protection empowers a higher percentage of the population to participate in
the economy, allowing the government to collect more tax revenue. A stable government with
peaceful elections is also more likely to honour its debt obligations throughout economic
cycles.

Environmental risk, on the other hand, generally does not have an immediate effect on
government’s ability or willingness to pay its creditors. But environmental concerns can be
significant to citizens’ well-being. For example, the problem of heavy pollution might manifest
itself through social grievances, which could destabilise the society. When conducting sovereign
research, it is important to analyse a country’s demographics, political structure and election
dates. We gain external input from the World Bank’s Doing Business Report, World Bank’s
World Governance Indicators, Yale University’s Environmental Performance Index,
Transparency International’s Corruption Perception Index, Sustainalytics Sovereign ESG
assessment and the UN Sanction List. These inputs are presented at our sovereign strategy
meeting every six weeks.
Based on the metrics listed, we have developed a proprietary ESG scoring model. The model
scores countries based on their rankings on each metric and then provides a rating for all three
aspects of ESG. With each factor, we also look at the historic trends of each country’s
performance. External input from sources such as the World Bank’s Doing Business Report,
World Bank’s World Governance Indicators, Yale University’s Environmental Performance Index,
Transparency International’s Corruption Perception Index, Sustainalytics Sovereign ESG
assessment and the UN Sanction List can be valuable in this analysis.

Other factors investment managers should consider when developing an opinion on the ESG
factors of countries include each country’s historical performance and its present trajectory.
Analysts’ forward-looking assessments can help capture recent events, and can be compared
with an investment manager’s own forecasts of each country’s near-term trajectory. These
outputs can be supplemented by regular country visits by the investment manager and other
qualitative factors, such as political and event risk, which could have an impact on market
prices and credit quality.

NEXGEM index is imperfect due to high concentration risk

Ecuador 11.2
Egypt 8.8
Sri Lanka 7.5
Pakistan 5.8
El Salvador 5.2
Azerbaijan 5.1
Costa Rica 4.9
Nigeria 4.8
Jamaica 4.7
Cote D'Ivoire 3.8
Iraq 3.0
Mongolia 2.9
Zambia 2.6
Paraguay 2.5
Ghana 2.5
Jordan 2.5
Kenya 2.3
Guatemala 2.2
Senegal 1.8
Gabon 1.8
Bolivia 1.7
Honduras 1.5
Vietnam 1.5
Angola 1.4
Belarus 1.2
Namibia 1.0
Georgia 0.9
Armenia 0.9
Ethiopia 0.8

Source: JP Morgan, 31 Dec 17. Past performance is not a guide to future results.
Frontier bonds have seen strong growth in recent years

Growth of Indices

550
!
500 21.8

450 19.6

400 17.4

350 15.2

300 13.0

250 10.9

200 8.7

150 6.5

100 4.3

50 2.1

Source: JP Morgan, 31 Dec 17. Past performance is not a guide to future results.

Opportunities and risks in frontier markets

Expectations for robust economic growth

Frontier market economies are projected to have some of the highest economic growth rates in
the world over the next five years, driven by factors such as the low penetration of goods and
services, favourable demographics, rapid urbanisation, technology transfer, and increasing
availability of credit to the private sector.

Favourable demographics
In contrast to many developed countries, frontier markets have a young, growing population
that will contribute to a developing workforce and increased domestic consumption.

Improvement in governance and accountability

Encouragingly, governance and accountability have found their way up the agenda in recent
years. Political leaders generally understand the need for orthodox economic management to
maintain a stable economy and attract inward investment. The electorate tend to be much
better informed, which means corruption and accountability are now heated topics during
elections. Several of the most populous frontier nations, including Pakistan and Nigeria, have
seen a genuine entrenchment of democracy, while others such as Myanmar and Sri Lanka have
emerged from decades of obscurity.

“Convergence” and diversification benefits

Investing in frontier markets also offers the potential for valuable diversification benefits.
Correlations relative to developed markets have generally been lower than their emerging
markets peers, as have intra-country correlations within frontier markets itself given the highly
diverse nature of the asset class. As these markets open up to foreign direct investment (FDI),
correlations are likely to increase. But there will be other benefits, including the adoption of
global best practices on the part of local corporates and better access to funding and more
advanced technologies from abroad.

Greater prevalence of mispricing and other market inefficiencies

For fundamental, research-driven investors like Aberdeen, there are opportunities to capitalize
on market inefficiencies that occur because of short-term liquidity squeezes, weak intelligence
or corporate analysis, and naturally fewer market participants.

Credit risk showing some signs of fatigue

Sovereign default risk is generally a low concern at present although there are a handful of
countries with high debt levels due to worsening fiscal positions and softer growth over the
past few years. A number of countries have sought IMF support to help mitigate financing
concerns, which in turn has helped to reduce risk premiums. However, this will not necessarily
prevent a credit event from occurring.

Interest rate risk has been falling amid lower inflation

The risk of interest rates increasing due to fundamental or technical factors is a key risk for
local currency bonds. The former is a risk that could occur from poorly managed monetary
policy or a terms of trade shock that could lead to an inflation spike, whereas the latter is
arguably a lower risk given the small size and low foreign ownership of local market bonds.

Political risk is typically high

As countries with fundamentally weak institutions, political risk tends to be higher compared to
mainstream emerging markets, which in turn can result in a less predictable policy
environment. The prevalence of dominant political parties, or in some cases one party rule, can
often result in deteriorating policies which in turn can erode willingness and ability to pay.

Liquidity risk comes with the territory

Of all the risks, liquidity risk differentiates frontier markets the most from more mainstream
emerging markets. By nature, frontier equities and bonds are more thinly traded than
mainstream emerging-market assets, with generally higher trading costs. Liquidity in particular
varies greatly, with several markets lacking scale and depth in comparison to more mature
emerging markets.

Currency risk is “food for thought”

Currency risk could have an impact on valuations on equities and local market bonds due to the
lack of liquidity in foreign exchange markets. This can result in large market movements that
are not necessarily associated with fundamental factors. A limited history of central bank
independence and persistent threat of inflation in some countries that is usually driven by food
inflation can also have a great impact on currency valuations.

Summary

Frontier markets are an interesting investment opportunity for a long-term investor, offering
the potential for significant growth and development over time. Given their diverse nature and
lack of analyst coverage, investors seeking exposure to frontier markets should consider
working with an experienced investment manager that has a deep knowledge of these markets
and a history of successfully investing in them. While this may be a “new” asset class for some
investors, it will be very familiar to a skilled investment manager who has a solid track record of
investing in frontier markets.
SHARE VIA

(HTTP://WWW.FACEBOOK.COM/SHARER/SHARER.PHP?
U=HTTPS://WWW.ABERDEENSTANDARD.COM/EN/INSIGHTS-
(HTTP://HTTPS://WWW.ABERDEENSTANDARD.COM/EN/INSIGHTS-
THINKING-ALOUD/ARTICLE-PAGE/THE-EVOLUTION-OF-
THINKING-ALOUD/ARTICLE-PAGE/THE-EVOLUTION-OF-
FRONTIER-MARKETS&TITLE=THE EVOLUTION OF FRONTIER
(HTTPS://WWW.LINKEDIN.COM/SHAREARTICLE?
FRONTIER-MARKETS)
MARKETS)
MINI=TRUE&URL=HTTPS://WWW.ABERDEENSTANDARD.COM/EN/INSIGHTS-
(MAILTO:?SUBJECT=THE EVOLUTION OF FRONTIER
THINKING-ALOUD/ARTICLE-PAGE/THE-EVOLUTION-OF-FRONTIER-
MARKETS&BODY=THE EVOLUTION OF FRONTIER
MARKETS&TITLE=THE EVOLUTION OF FRONTIER MARKETS)

RISK WARNING

The value of investments, and the income from them, can go down as well as up and you
may get back less than the amount invested.

The views and conclusions expressed in this communication are for general interest only and should not be
taken as investment advice or as an invitation to purchase or sell any specific security.

Any data contained herein which is attributed to a third party ("Third Party Data") is the property of (a) third
party supplier(s) (the "Owner") and is licensed for use by Standard Life Aberdeen**. Third Party Data may not
be copied or distributed. Third Party Data is provided "as is" and is not warranted to be accurate, complete or
timely.

To the extent permitted by applicable law, none of the Owner, Standard Life Aberdeen** or any other third
party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability
for Third Party Data or for any use made of Third Party Data. Past performance is no guarantee of future
results. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to
which Third Party Data relates.

**Standard Life Aberdeen means the relevant member of Standard Life Aberdeen group, being Standard Life
Aberdeen plc together with its subsidiaries, subsidiary undertakings and associated companies (whether
direct or indirect) from time to time.

© Standard Life Aberdeen

Legal notice (/legal-notice)

Cookie policy (/cookie-policy)
Privacy (/privacy)
Security (/security)
Legal and regulatory information (/legal-and-regulatory)
Accessibility (/accessibility)
Contact us (/contact-us)

Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset

Management and Standard Life Investments.

Investment involves risk. The value of investments, and the income from them, can go down as
well as up and an investor may get back less than the amount invested. Past performance is not
a guide to future results.